I'm Peter Goldsmith, Professor in the Department of Agriculture and Consumer Economics. I direct the food and agribusiness program, here to talk about the economics of postharvest loss. The economics of postharvest loss covers a number very important issues. Many of them on the macroeconomics side in terms of policy issues, pricing trade, the effects of supply on global prices, things like that. But in this talk, we focus on the subject of the microeconomics of loss, the business economics of loss. Specifically, our research and work and tries to understand why a manager allows loss, why would a manager do that? So we faced a conundrum, really in our study site where we are doing our research in Mato Grosso, Brazil. In that it's the largest agricultural state in Brazil, it's the largest soybean state in the world, but its losses are more than double what the government recommends or expects in the losses are in excess of 10% of production so they're significant. So why producers would allow that is an interesting question that we were wrestling with. So counterintuitively, our research finds that all loss, postharvest loss, isn't bad. And that zero or even low levels of loss may, in fact, be optimal, which you might not have thought about that. The three walkaway concepts I hope to leave you with. One is the marginal cost of postharvest loss reduction. That is to say that the cost to reduce loss is not constant. Okay, for example, the cost to reduce the first unit of loss is cheap. This would be shoveling up piles of grain back into a truck, or something like that. But the cost reduce the last unit of loss, that can be infinitely expensive. So, it's not constant this cost this marginal cost of postharvest reduction. The second concept I want to leave you with is the concept of opportunity cost and opportunity cost of postharvest loss reduction. So these farm managers, these managers are engaging in a tradeoff when they attempt to reduce postharvest loss. And clearly we know, and it's somewhat obvious that you have a tradeoff for the cost of a liner for a truck to reduce the loss of grain through the cracks in the truck. So that makes sense. But there's also tradeoffs with respect to harvest speed. And as you harvest more quickly of course, losses start to rise. But you may have to tradeoff those losses because of weather risk, rain coming in. This is very common in tropical settings, and tropical setting are the high growth areas for grain production, where we're going to see a lot of the food produced to meet our goals by 2050 to reduce malnutrition globally. So these are tough areas to produce grain. There's also something we study fairly aggressively, something called succession cropping. Again in tropical areas, you could farm year-round. So one crop follows another and you might sacrifice that first crop to get that second crop in. And so, you might have losses in that first crop substantial losses to maximize the second crop. And then, Brazil this practices a very, very common, increasingly common and called safrinha and we see it really as an interesting new technology for low-latitude, tropical areas of production. The third concept I want to leave you with are agency problems associated with postharvest loss reduction. Think of the employee as an agent, hence the term agency. So agency problems occur because the owner of the grain is not necessarily the operator of the equipment and the operator of maintenance and things like that. And the idea is that the manager of the grain if that's the owner will more aggressively reduce postharvest loss compared with an employee. So these high growth tropical producers, they employ a lot of labor. It's not the owner sitting in the combine, or in the truck. So our question with these agency problems in postharvest loss has to do with how we train and incentivize employees to reduce postharvest loss because it's not their grain. So, let's conceptually look at these three key economic concepts associated with postharvest loss reduction. Marginal cost, opportunity cost, and agency problems. On the horizontal axis you have loss reduction, on the left you have zero loss reduction, and on the right you have a 100% loss reduction. So on the left hand side would be an unrealistic situation where you have no grain production. All loss and you have no loss on the extreme right. There are costs though to reduce postharvest loss and they're measured on the right hand vertical axis where it says cost of postharvest loss production. There's a line in there. The supply of postharvest loss reduction, this S0 line traces out the costs to mitigate postharvest loss where the costs are low for the first unit way on the left, and rise quickly to almost an infinite cost for the last unit as you move to the right hand side. But there are also benefits to reducing postharvest loss, which are obvious. Most simplistically you measure it as the price of grain. So each unit of grain that you avoid the loss of you have to sell. And we measure that on the left hand vertical axis. So when we start at point L0 which you can see there, a loss level, the price of grain is, let's call it low, and relative to the marginal cost of postharvest loss reduction, it warrants moderate levels of postharvest loss reduction. So it's not all the way over to the right, complete mitigation of loss more far to the left with lots of loss. But as the value of grain rises, so the horizontal price line rises from P0 to P1, the benefits of mitigating loss to rise. And allows for higher marginal costs of reduction. So the manager can engage in more reduction. Thus farmers' willingness to pay or invest in postharvest loss reduction technologies, investments rises with price. But also, if we look on the next slide, prices too can fall. So less loss is mitigated. But what's interesting about this second slide and when the benefits of a mitigation fall is that policy makers too would care less about PHL reduction. Because when prices fall, the cost of food falls, and the food supply is more abundant. Let me make things a little more complex, though. Suppose the price of grain does not fall. It just sits there at P0. But it's possible that for the farmer, the manager, the benefits to mitigating loss might fall, might change when they try to reduce loss beyond L0. There is limited time here, but for example, we see this occurring in succession cropping systems in the tropics. Where farmers sacrifice the first crop, increase losses in that crop to protect the second crop. So the price of in this case, soybean doesn't fall but the soybean losses are increase to allow a second crop in this case. In the case of Mato Grosso its maize to be planted in a timely fashion, so you're sacrificing one for the other. So, the benefits of mitigating sort of being lost fall. So, in Mato Grosso farmers will advance harvest, will desiccate soybeans and increase soybean losses to allow for an early planting of the succession maize crop especially if the price of maize is high or relative the soybean. So there are a lot of factors there, that effect whether a manager will sacrifice one product for the other. Finally, we can think about the age and see problems in terms of the different cost curves to managers when they attempt to reduce postharvest loss, you see there three supply functions we call them. Cost curves related to the cost of reducing postharvest loss. Farmer S1 furthest to the right has the flattest curve. That's an inefficient producer of postharvest loss reduction and for a given grain price reduces a lot of postharvest loss. But maybe farm S2 employs a lot of labor, a lot of equipment so reducing postharvest loss is much more difficult so the S2 curve is steeper. Does the farmer reduces less loss at every level of grain price? So it depends on the type of business, the business structure and the type of business that's operating. Finally, these three concepts have significant implication for farmer leaders, equipment manufacturers, and policymakers. First, the farmers in our study site, Mato Grosso, Brazil, do not make postharvest loss reduction their highest priority. So policy and private sector industries should understand that willingness to pay or invest in postharvest loss mitigation technologies are low. Second, for policy makers they need to be cognizant like the managers. They need to balance benefits of postharvest loss reduction with the cost. A good example is focusing on road improvement. Whereby, there are significant postharvest loss reduction benefits by improving roads. But the costs are spread over all users and uses of the road, so it's not very expensive per unit of loss reduction. Another example is public investment in grain science education, that can produce a workforce better equipped to meet the challenges and expectations of modern agriculture. And finally, equipment manufacturers need to understand the complexities of the tropical farm manager's problem, whereby loss reduction is just one among many challenges the manager faces. Thus low cost or passive or bundle technologies to reduce postharvest loss may work best. For example, postharvest loss reduction often involves care and meticulousness for maintenance through to operations. In temperate climates, owners often operate field equipment. Equipment is new and the quantity of rolling stock per farm is low. For tropical grain farmers though, the farms are larger. They employ high volumes of rolling stock. Equipment is older, and owners do not operate the equipment. The separation of ownership from operations creates the agency problem. So will employees be vigilant about postharvest loss reduction when they do not own the grain. So for equipment manufacturers, what PHL reduction systems work best in the hierarchical farming system. And so technologies need to reflect that. [SOUND]
