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Comment by animefan | Hacker News Reader

CA farmers are increasing nut trees acreage because nut trees require a lot of water, and thus nut prices are going up in the current drought

It simply isn't possible for things to happen the way you describe them.

Prices are a function of supply and demand. When you say "nut trees require a lot of water, and thus nut prices are going up in the current drought" this implies that supply of nuts went down during the drought. Otherwise, consumers would have no reason to care about the amount of water required to produce nuts.

Given this, "CA farmers are increasing nut trees acreage" must be an incomplete picture. Even if some farmers are increasing acreage, there must be others who are decreasing by even more, otherwise prices would be going down, not up.

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You're only looking at half his argument. Nut costs are up, because nut trees are thirsty. Everyon eknows this, so consumers accept that nut prices go up (also nuts are more popular than they used to be). As long as nut prices are going up faster than nut costs, so will nut acreage. It's a mistake to rely on simple supply-and-demand to analyse this situation because laws of supply and demand are generally considered in an atmosphere of perfect competition, and ceteris parabus - all other factors being held equal other than the water cost, in this case. But neither condition is true. Nut pricing is not just a function of production cost, but also of public taste, advertising, availability of substitute goods, and so on.

Nut costs are up, because nut trees are thirsty. Everyone knows this, so consumers accept that nut prices go up

That doesn't make sense. Consumers have no reason to care why prices change. Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?

It's a mistake to rely on simple supply-and-demand to analyse this situation because laws of supply and demand are generally considered in an atmosphere of perfect competition, and ceteris parabus - all other factors being held equal other than the water cost, in this case.

It's a bigger mistake to assume consumers behave in ways that make no sense, in order to justify someone else's verbal argument (which made no reference to why consumers would act a certain way, and probably didn't even consider the issue).

It doesn't make sense because you didn't read it properly.

Consumers have no reason to care why prices change.

In a world of pure supply and demand considerations that would be true. but as I've pointed out, we don't live in that world. We live in a world where many consumers are experiencing the same drought as the nut growers, and are aware of the impact it could have on prices, either because they live in the same place as where the nuts are grown or because they like to read the news.

Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?

No, and I didn't say that they did. I said they "accept that nut prices go up." Someone who enjoys nuts will limit their consumption if prices go up so much that the nuts are no longer affordable, but if they only go up a bit that person may consume the same amount of nuts they did before at a higher price because there isn't a suitable substitute. In other words, consumer preferences can result in inelasticity of demand.

Except a) this is an issue I happen to already be familiar with and b) I find consumers' behavior quite rational when I consider the totality of the circumstances.

>In a world of pure supply and demand considerations that would be true. but as I've pointed out, we don't live in that world. We live in a world where many consumers are experiencing the same drought as the nut growers, and are aware of the impact it could have on prices, either because they live in the same place as where the nuts are grown or because they like to read the news.

None of this explains how knowledge of supply shocks would change a consumer's intrinsic demand for nuts.

>In other words, consumer preferences can result in inelasticity of demand.

Earlier you said As long as nut prices are going up faster than nut costs, so will nut acreage

No matter how inelastic demand is, it is impossible for prices to increase faster than costs. In the limit of infinitely inelastic demand, prices increase at the same rate as costs (all costs are passed on to the consumer).

I agree that supply shocks are not changing the intrinsic demand for nuts. Rather, nut popularity happens to be increasing around the same time as a supply shock.

That only obtains under perfect competition, as I already said. I'm not trying to convince you that this behavior falls out of basic economic laws, I'm saying you're looking at it in the wrong context. Please look up the terms perfect competition and monopolistic competition, or we will just be talking past each other.

Re ceteris paribus, I address simliar criticism here: https://news.ycombinator.com/item?id=10064126. The key point is that the original post I was critiquing was already implicitly keeping all other factors fixed. And I only aimed to critique that post's reasoning, not the conclusions it made.

As for imperfect competition (which I'm also familiar with, I have a PhD in economics), I see you mentioned it above but I still don't know why. Even if not sellers were a monopoly or oligopoly, everything I said above would apply, at least in very broad terms. You could probably come up with some demand function such that increasing input costs of a monopolistic producer resulted in an increase in production, but I don't see why you would think that actually applied here.

That doesn't make sense.

The world often doesn't.

Further up the thread is the citation that the thing you insist can't happen... is happening. Might be time to adjust your economic theories.

It's a peculiar thing I've noticed on HN and a few other places where people with slightly-better-than-average understandings of economics tend to congregate:

> I have a model of economics which makes sense to me

> Here is a case in the real world that breaks my model

> The real world must be wrong.

It makes economics resemble religious ideology rather than an attempt to understand and predict real-world behaviors.

I've answered similar criticisms elsewhere in this thread, feel free to respond to them directly. I have a PhD in economics, so hopefully more than a "slightly-better-than-average" understanding of economics.

> Prices are a function of supply and demand.

Sure.

> When you say "nut trees require a lot of water, and thus nut prices are going up in the current drought" this implies that supply of nuts went down during the drought.

No, it doesn't. It could equally (in a real market with humans instead of an ideal market with rational actors -- particularly, in a market in which the perfect information assumption of rational choice theory does not hold) mean that demand for nuts increased because purchasers (not necessarily consumers -- nuts are purchased by lots of processed-food makers) expected supply to decrease in the drought, and there was a desire to stock up before that occurred.

> if some farmers are increasing acreage, there must be others who are decreasing by even more, otherwise prices would be going down, not up.

Even if we assume that the price increase must be supply driven (rather than demand driven based on price expectations based on beliefs about future supply), this is wrong, because it assumes that production per acre is constant, rather than, e.g., declining in a drought. If production on the same land use drops in a drought, then you could have reduced supply driving prices up without reducing land use -- depending on elasticity, this could conceivably even increase the total revenue of almonds sold -- leading to increased incentives to bring more acreage into production.

I suppose that could happen, is there any particular reason to think it is?

>Even if we assume that the price increase must be supply driven...

That doesn't matter to me, I was arguing against a specific mechanism. I never said there was no reason that more acreage might be used. I said that the reasoning of the poster was wrong.

depending on elasticity, this could conceivably even increase the total revenue of almonds sold

It really couldn't. If you are, as you say, assuming prices are driven by supply and demand, and there are no demand shocks, then total revenue must go down. That is econ 101.

...assuming prices are driven by supply and demand, and there are no demand shocks, then total revenue must go down. That is econ 101.

If that's what you learned in that class, you should ask for a refund. If the demand curve is relatively steep (i.e. not elastic), then a supply shock (e.g. a drought) could change price drastically while changing quantity very little. This is not an uncommon situation, especially with respect to food commodities.

[EDIT:] Haha whoops! I certainly didn't intend to tell you anything about your own field. I think that in this case you might be missing important details about the situation on the ground. Irrigation water isn't auctioned off to the highest-bidding farmer. Rather, different farmers have rights to various amounts of water, and those rights are ordered so that some farmers will get nothing in a drought while others will get the same amount they get every year. So, while the industry as a whole has not profited from the supply shock we're discussing, the "lucky" farmers with senior water rights certainly have.

I actually have a PhD in economics. You are right that revenue can increase due to a supply shock. What I should have said is that revenue net of costs can never increase due to a supply shock. Because of this, the full statement this could conceivably even increase the total revenue of almonds sold -- leading to increased incentives to bring more acreage into production is still wrong.

Consider the limit as demand becomes (locally) infinitely inelastic. Then a shift of input costs of X will cause the price to change by X. Total volume (call it Y) of goods sold stays the same and total revenue increases by YX. Total revenues net of costs remain the same since total costs increased by YX.

The main point here is that markets don't do weird counterintuitive things, at least in a partial equilibrium analysis. Shocks to the costs of inputs always result in less production and less profit.

[Reply to edit] No offense taken, I shouldn't have said "econ 101" in the first place since it could be interpreted as disparaging. What I meant is that once we accept the assumptions of partial equilibrium analysis, it really constrains what can happen, and it can be shown by simple well known theory. And you were right, I wrote "revenue" when I should have written "profit".

I'm sure that what you are saying about water rights is true, but I'm simply arguing that the increased "cost" of water must move the supply curve of nuts up (at every point) not down. This shift of the supply curve might cause some people to stop growing and others to start, there is nothing in the theory that contradicts that. But everything in this thread still fits into partial equilibrium analysis.

Well maybe next time you could read a bit more about the situation, before hauling out the neoclassical big guns on us. Anyway I don't think anyone has suggested that the supply curve for nuts has moved down. You got confused because you made assumptions about that, based on limited information about the supplies of necessary inputs to nut production.

I think that the issue is that I only wanted to critique the following line of argument:

CA farmers are increasing nut trees acreage because nut trees require a lot of water, and thus nut prices are going up in the current drought, and thus the farmers are rushing to increase the production of such profitable product. (Heard on NPR)

Taken by itself, this contradicts neoclassical economics, no matter how charitably you read it. If it were implied there were more complex mechanisms whereby acreage increased even while total production decreased (as neoclassical economics implies it must), then the statement could not use the words "because" and "thus" in the way it did.

You and others have implied that I was wrong because the conclusion that nut tree acreage increased is still possible, but I never said it wasn't. I think it's perfectly fine, and important, to critique an argument as opposed to a conclusion. If I let this slide, then should I also nod and smile when someone argues that people should buy local since it makes everyone richer?

don't forget the timing - because of the drought the supply may have been hit (even if only in futures market at wholesale stage), thus price increase - thus planting more trees today to catch what seems to be great profit tomorrow. Anyway, i only mentioned what i heard on NPR. Another commenter found and posted the link to it.

Or, yields have dropped in the drought so farmers are forced to increase acreage? Probably that?

That could well have happened, but that's not my point. I was critiquing a certain mechanism, which claimed that an increase to input costs could, in itself, cause in increase in supply.

> I was critiquing a certain mechanism, which claimed that an increase to input costs could, in itself, cause in increase in supply.

That was not the claim. The claim was that an decrease in supply of one input (water) could drive market conditions which lead to an increase in consumption (in the course of production) of another input (land use).

What you're missing is that water is not an input cost for many of these farmers. The farmers that have cheaper access to water are increasing production of these same water intensive crops, because they are more lucrative. The problem is in assuming a level playing field in the market, which it isn't entirely, due to how water is dealt with in CA.

If water wasn't an input cost for all farmers, then the price of nut wouldn't have gone up in the first place. As I said, there must be some farmers who face increases in costs, and there must be some farmers whose costs increase enough that they produce less. Otherwise, prices would not have gone up in the first place.

Why not? It's possible (I make no claims as to whether it's correct) that a large portion of farmers do have water as a cost, enough so to affect price, and as the price increases, the farmers that weren't growing nuts (or were more diversified) that don't have water as a cost (or its cost is less than it is for other farmers) may switch to the lucrative crop, exacerbating the problem.

I don't think it's that much of a stretch to think that instability in market prices for a good may cause odd market behavior that has consequences in related areas.

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