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Jeremy's Blog 25th June 2021: Markets

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 24th June 2021.

In the more agricultural world of two hundred years ago, the economist David Ricardo summarised pricing in a market economy:
“Corn is not high because rent is paid, but rent is paid because corn is high.”

The price of corn rises with the demand for it since, in Adam Smith’s phrase of forty years earlier, “Consumption is the sole end and purpose of all production”. Production has no value unless buyers want it. Cost does not generally drive price; price can force review of production as the balance of supply and demand shifts.

Ricardo saw stronger corn prices leading farmers to pay more to rent land, often more marginal land, on which it could then be grown profitably. The simple model develops as more crops or other uses are introduced, bringing into play the powerful economic force of substitution as other profitable uses or cheaper ways are found to do things.

The flexibility by which those processes incrementally manage change and test innovation, typically by trial and error, led Adam Smith to talk of the “invisible hand” by which business decisions deliver communal good with the bias to re-allocating resources and effort where they will do more for the future.

England’s Agricultural Transition, heralded in 2018, deploys these powerful forces as it withdraws Basic Payment over seven years. Area payments have muffled change here while competitors have become more efficient. Now costs, asset values, the use of technology, investment, debt, labour and business structures will all progressively adapt in response over the years of the transition, each change opening doors to new change.

Just as important will be how the use and occupation of land can move into the hands of those who will use it best, giving a return to landowners and building the competitive rural land uses of the future.

Valuers, understanding markets, will see these processes more clearly than most as costs are reduced, businesses change and opportunities found. This may variously see new businesses, more production under cover, more added value production and a greater focus on environmental outputs alongside continuing commodity production.

The same forces are coming to work in climate change mitigation as markets reduce the cost of capital for renewable energy and increase it for coal-based businesses. Bank of England modelling suggests that the newly-set £45/t UK carbon price may reach a maximum of £800/t before 2050, driving the changes that will squeeze ever more carbon out of the system.

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