Thanks to the run-up in world food prices widely attributed to ethanol subsidies in the US and the UK – and the subsequent crash – farmers all over the world have likely made unrealistic calculations about food prices. Prices of course rise and fall all the time, but generally only huge technological leaps or demographic shifts (of which there have been none) will cause prices to vary so much that the majority of entrepreneurs will fail miserably in their investments. The exception to this is government action, which can in an instant blow apart or liberate markets, with the awesome power of the state's legitimacy and implicit threat of violence.
The New York Times documents this phenomenon in Senegal, where ethanol subsidies in the US and Europe indirectly drove the price of rice above its historical level, and now that it's set to fall back down, many small farmers are going to fail miserably.
Something interesting to note is that a previous government malinvestment exacerbated the flight to rice farming:
But the crisis also presented an opportunity to millions of farmers across Africa: high prices could finally make their crops competitive.
In Senegal, farmers eyed the long-neglected Senegal River valley, which snakes along the country’s northern border with Mauritania. A government project in the 1970s built irrigation canals that made more than 600,000 acres of land ready to produce rice, but farmers were too poor to afford the materials to farm the land on a large scale. The project was largely abandoned.
Nevertheless, the dream of creating a rice basket here never really died.
The "dream" never died, and neither did the fixed cost of the investment, unfortunately. Here we have an efficient market mechanism – a large fixed cost in the form of irrigation canals which normally would have prevented the irrational malinvestment in rice – that was destroyed by a government, exacerbating the effects of a bubble.
Also interesting to note is that the proximate government failure – that of America's corn ethanol subsidies – was one that was championed by Barack Obama when he was in the Senate. He later had the good sense to step back from his support of ethanol subsidies, though he's understandably reluctant to mention this failure when he discusses the industries that America's new green energy plan is going to subsidize. Unfortunately, we're already hearing ways that his post-ethanol energy agenda could go horribly wrong for the environment and the world's poorest countries.