Long-Term Grain Futures as an Eco-Forum

by Robin Hanson

The Current Debate

Many people also worry that we are mistreating our farms, and that if we don't stop we may have much higher future food prices. Top soil is disappearing from the U.S. midwest at an alarming rate, and fresh water sources seem to be running out. Farmers are just not thinking about the future, they say, and these alarming statistics are not widely known.

Many people also worry that rising population will some day outstrip our ability to feed everyone, making food prices rise beyond the means of many to afford it (i.e., many may starve). They fear sudden crises such as we often see in biological systems, where only mass starvation corrects a population overshooting it carrying capacity. In the nearer term, many worry that demand from newly-rich places like China will raise prices.

Other people think these aren't really problems. Farmers know what they are doing, and they are making appropriate economic tradeoffs between saving their land now vs. dealing with problems later. If they could make more money by being nicer to their land now, in trade for allowing them to sell more crops in the future, they would.

Similarly, people argue that parents know what they are doing when they have children. As people get richer they are having fewer children, and people have enough foresight that they would naturally have fewer children if we started to come up against fundamental limits in producing food.

A New Forum/Solution

Most people seem to want to try and generate a consensus on who is right here, the optimists or the pessimists, before continuing on with the policy debate. Instead, I'd like to propose that both sides work together to create an institution that should help us deal better with this situation, regardless of which side is right.

Let us create long-term grain futures markets. Imagine, for example, that the U.S. government sold some small fraction of its federal debt in the form of a variety of long term commodity futures. Instead of just accepting your cash today in return for a promise to give you cash in 30 years, they could accept your cash today in return for promises to give you grain, gold, hog bellies, CPI (Consumer Price Index) indexed cash, etc. in 30 years. They could sell, say, $1M of each of these types of futures at a distinct annual auction.

These markets could serve two important functions. First, they could serve to extend our common foresight, directly warning of expected future rises in grain prices. The pessimists seem to be most worried about big crashes unanticipated by myopic farmers and parents, and a futures market could give them a direct relatively-unbiased estimate of these future prospects. The mass media should trust such market estimates enough report on any dramatic price changes.

Second, these markets could serve as a consensus-building forum regarding the likely consequences of pursuing status quo policies. One side appears to think that inflation-corrected grain prices will be much higher in several decades, relative to some CPI-index futures, while the other side thinks they will be lower. Long-term grain and CPI futures markets would let us learn what market speculators think about how many year 2030 CPI-indexed dollars it would take to buy a year 2030 bushel of grain.

Of course those speculators might be wrong, but whichever side claims that they are wrong would be given this challenge: go and trade in that market to fix the market price -- if they really believe what they are saying, they should expect to make a lot of money (or buy a lot of food security) that way.

Third, similar markets could serve as a forum for creating consensus on the likely consequences of pursuing alternatives to status quo policies. By using called-off trades, policy markets could allow us to estimate future grain prices conditional on population levels, on CO2 levels, or on the adoption of any particular alternative policy.

Getting Started

Futures markets are heavily regulated, and so it would now be very expensive to set up such a market just to make a point on this topic. Those who care about these issues might, even if they strongly disagree on the answers, join together to lobby for relaxing the regulatory strangleholds that now prevent such long term futures markets. They might even lobby to create the U.S. debt sold via such futures idea described above.

Even without regulatory changes, however, pessimists might make a point by going to various big argicultural companies and offering money now for grain delivered in 2030. If these companies won't accept such an offer at a price which implied near constant grain prices, that would argue against the optimistic position. These pessimists could then challenge the optimists to personally agree to these contracts. Conversely, optimists could make a point by making the opposite offer.

Once we had real long term futures markets, we could worry more about making them robust to future financial and political upheavals. We could make several futures markets across the world, and then try to reinsure contracts on a global level, for example.

Robin Hanson April 26, 1996
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