Thursday, August 11, 2011

Commodity innovation and long-term supply

There is growing fear about shortages in commodity supplies but there is little discussion on the differences in commodity markets and how supply problems will be solved.

I will make a distinction between search, novelty, and creation innovation with respect to commodity markets. Some commodity supply is determined by whether new supply is found. For example, oil and natural gas reserves are found. Innovation is used to help with the search process to find new reserves. Supply is also created because the amount of recoverable reserves are increased through increases in yield. Hence, there is search innovation and yield innovation.

The same to types of innovation occur with other extraction commodities. Mining is not involved with creating new commodity supply. Search technology is necessary because there is no new production of oil and gas. There supply is fixed and depleted.

There is a difference in supply creation with agricultural markets. New supply is not found. There can be yield innovation but not search innovation. Yield innovation will be through better seeds. Genetics helps with yield innovation but there is not search but creation technology. New hybrid seeds can be created but the biodiversity in agricultural markets is actually declining. Given that diversity is declining, the risks with agricultural markets are different than extraction commodities where a search process may be able to find more supply.

New production can be used to replace supply that has been consumed, but there is no search for supply. You generally cannot prospect for seeds. Hence, there is a greater dependent on innovation science to solve food problems. There is less likelihood that we can predict or generate a pipeline of potential new production because we do not know when new innovation can occur. With search we can be more systematic and determine through effort how much can be found.

The types of innovation that need to be made can effect the potential for new supply. We may be bale to generate new seeds. Hence, we may be bale to use science to create new supply, but for depletion commodities there is a limited supply which can be exhausted.

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