The opposite of speculation

A lot of people complain about speculation in agricultural commodities as the root of all sorts of evils. But what does it look like when there’s no speculation at all?

The pork belly is in danger of going belly-up... just six contracts changed hands in the month of November—fewer than uranium or palm oil. The once-bustling pork-belly pit has been moved to a corner of the CME's floor, an appendage to the lean-hog-trading pit.

There are several reasons, but a big one is that

Financial traders have largely shunned the contract because it requires buyers to take possession of massive quantities of meat.

It seems even small-scale market participants appreciate this dynamic:

"For a contract to be successful, you have to have fund participation" from hedge funds and commodity funds, said Dan Norcini, an independent livestock trader in Idaho who has been trading commodities for more than 20 years. "There're not enough volumes for them to move in and move out." Mr. Norcini stopped trading pork bellies about three years ago.

The moral of the story, as usual, is that “speculators” provide liquidity and liquidity is by and large a good thing.

Surging commodities ≠ inflation?

Paul Krugman doesn't think surging commodity prices will drive high inflation (and Michael Roberts agrees). I think they're probably right on balance, but I wish Krugman had plotted year-on-year commodity price and CPI changes on different axes in this graph:

Yes, the magnitude of year-on-year changes as drastically different, but eye-balling it, the directional correlation looks pretty high to me. Granted commodities are a small fraction of the our rich-world expenditures (not the case in poor countries where people spend 50+% of their income on food!); they are mostly wages and rent as Michael correctly points out. But it would also be worth looking back to before 1993, in particular the late 70s (a time of high commodity prices and high inflation), rather than acting as if 15 years of data from a single country proves the point beyond a shadow of a doubt.

Styles 2010 energy round-up

Geoff Styles, as preeminent an energy blogger as there is, has a little round-up of 2010 in energy, which is worth reading in full (including links), so I won't paraphrase it exhaustively here. He comments that the two truly unforeseen and shaping events of the year were Deepwater Horizon and "the less spectacular but no less profound awakening to the possibilities of the shale gas revolution." His comment on shale gas is particularly insightful:

That might help explain why the developers of renewable electricity sources such as wind have struggled so much this year, despite receiving $3.9 billion in direct cash grants from the US Treasury. They're not competing with $90 oil; the US generated less than 1% of its electricity from petroleum this year, through September. Instead, they're competing with gas at an effective price of $25/bbl or less.

Here's the killer graph:
Shale gas really is a game-changer, but its continued rapid growth is not a foregone conclusion. The two massive unknowns that I will be watching closely in 2011 are the environmental impact (already much debated and increasingly feared), and how it evolves outside of North America - in previously gas-vulnerable Europe, and even more so in China, where the reserves are likely enormous and the government has the power to develop them rapidly, if desired.

With that, Merry Christmas to you and your loved ones, and I will get back to mine.

Sidling away from climate debate

While results from Cancun seem to warrant cautious optimism, it seems fewer and fewer actors want to tackle climate head-on in the U.S.:

After two years of fairly disappointing outcomes at the U.N. climate summits in Copenhagen and Cancun, and after watching hopes for cap-and-trade or other measures to regulate carbon fizzle in the U.S. Congress, a growing slice of those favoring investment in clean-energy are working hard to ditch the association with "climate," which now seems to many a losing political issue. As the Breakthrough Institute's Ted Nordhaus put it, "We need to free energy from the polarizing climate debate."

This seems like an obvious step, in retrospect, and potentially a very positive and effective one. After all, climate is only one form of environmental pressure humankind is exerting upon the planet, and there are many other (inter-related) challenges to tackle (water, waste, agricultural sustainability, etc.). And hey, if it worked in Kansas...

Ethanol subsidies live another year

NOOOOO!!! Despite promising earlier signs, the ethanol tax credit renewal managed to sneak into the tax bill, so it's been extended into 2011 at least. Very disappointing, even though Geoff Styles thinks the subsidy won't last past next year.

Cocoa corner appears to fail

Remember the great cocoa heist of 2010? Seems that good weather and a promising harvest in the Ivory Coast sunk the whole scheme, which is now being unwound. Hard to tell outside-in how Armajaro (the market cornerer) made out, but prices are already 30% down from this summer's peak and it's hard to imagine that they made a fortune.

The moral of the story is: it is really, really hard to make good risk-adjusted returns by taking directional bets on agricultural commodities. And if nimble hedge funds struggle to do it, we should be very cautious about the expectations we set of any pseudo-public entity (see #5) created to intervene in markets to manage volatility in agricultural commodities.

What 2 degrees would look like

Despite the optimism of climate gurus like Robert Stavins and Trevor Houser with the results of Cancun, a temperature rise of 2 degrees is almost certain and adaptation is here to stay. That's why these two videos by CCAFS (a new CGIAR initiative focused on climate change, agriculture and food security) are interesting. They feel overly scripted and a bit contrived (hasn't the Sahara been shifting back and forth for centuries, even before it had any help from us?), but nevertheless provide some anecdotal illustrations of what agriculture looks like when temperature varies by two degrees. There is a lot of adaptation (e.g. growing trees to shade coffee plants) and also some shift to livestock cultivation as hotter temperatures make land more arid and marginal. Maybe the latter is another sign that we should all just go paleo...

Paleo sustainable at global scale?

As my friends, loved ones and colleagues have probably tired of hearing by now, I've been experimenting since the beginning of October with the paleo diet. In a nutshell, paleo proponents believe that humans evolved over 2+ million years as hunter-gatherers, and only invented agriculture in the last 10,000 years (or is it 30,000? an evolutionary blink, either way), so we haven't had time to adapt, and are healthier eating the "original" human diet.

I won't get into the biochemical pathways responsible or the evidence for or against here (although if you are wondering, I do find paleo very easy to follow and have definitely gotten leaner since starting). The question here is, could 9 billion people sustainably eat paleo in 2050?

The obvious first guess would be no; to get a better back-of-the-envelope, when I have the free time and inclination, I think I'll try to compare productivity of somewhere like Polyface Farms with an industrially produced, grain-based human diet, and post the results here. This of course begs the question of whether Joel Salatin is the right benchmark (it's not realistic to expect the entire world to become enlightened philosopher-farmers, is it?), but it would be a good first step.

In any case, I find the question interesting from both pragmatic and moral perspectives... but until I have a sense of the answer, I am going to stick with paleo myself for all it's worth.

Ethanol quote of the day

Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time.

That's 17 senators from both parties, via the WSJ and Environmental Economics.

New IFPRI modeling and report

IFPRI just published a new report entitled "Food Security, Farming and Climate Change to 2050: scenarios, results, policy options" with new outputs from their robust IMPACT partial equilibrium model. The punch line is:

Our analysis suggests that up to 2050, the challenges from climate change are “manageable,” in the sense that well-designed investments in land and water productivity enhancements might, conceivably, substantially offset the negative effects from climate change. But the challenges of dealing with the effects between 2050 and 2080 are likely to be much greater than those to 2050. Starting the process of slowing emissions growth today is critical to avoiding a calamitous post-2050 future.

The last sentence is a very important one. While attention (including my own) may be drifting toward adaptation, the fact that significant climate change will almost certainly occur is not a binary determination. It could be bad or very bad, depending on the level at which atmospheric greenhouse gases stabilize (or not), and thus in the long run mitigation still has an extremely important role to play. The challenge, of course, is that both the distraction of adaptation and the long time horizon make it very difficult to muster a critical mass of political will behind mitigation actions that impose any sort of economic pain whatsoever.

Even reduced second-gen ethanol targets too high

Speaking of ethanol, despite all of the whinging about the reduction in second-generation ethanol target from 250 million gallons to only 6 million, producers will by their own admission struggle to supply half of that.

As cellulosic refineries across the country are stuck in start-up phase, the U.S. presently has the capacity to refine only "a few million gallons" of that type of ethanol annually, said Matt Hartwig, spokesman for the Renewable Fuel Association industry group.

Not surprising - the "valley of death" between demonstration and commercial scale has not been successfully bridged by anyone to date. The industry complains a lot about lack of sufficient capital, but it seems like more of a chicken and egg problem.

Bipartisan support to end ethanol subsidies?

In today's political climate in the U.S., it's rare to find bipartisan support for anything, let alone an eminently sensible idea like ending subsidies for ethanol. (Not to be confused with cutting the cellulosic ethanol RFS requirement for 2011 by 97%, which is unfortunate but necessary given that we haven't actually figured out yet how to produce cellulosic ethanol economically at scale.) It will be interesting to see how the 42 ethanol state senators push back against this one, but it does seem that the shifting balance toward fiscal conservatism makes it both more likely that subsidies could expire and more difficult for them to be re-established once the do, as NRDC's Nathanael Greene points out in the NY Times article.

I'm not close enough to corn futures markets to know to what extent the expectation of lapsing subsidies is baked in, but I'll be very curious to see how world grain prices react if subsidies are allowed to expire. The discontinuity may give us a crude sort of counterfactual to help answer the persistent question of how much biofuels drive up food prices.

Via Michael Roberts, who's also cheering.

Brief book review: Merchant of Grain

About a year ago I bought Merchants of Grain and never got around to reading it - in fact, I lost track and had to order another copy when I decided to read it over Thanksgiving. Here's my brief take on its pros and cons:

Pros

• In many ways this is analogous to The Prize, Daniel Yergin's outstanding history of oil, thoroughly tracing modern grain trading from its inception in the early 19th century to the present day.


• Depth of research - the amount of information crammed into the 360 pages is truly impressive, most of it quite relevant and interesting, and his journalistic nose clearly enabled him to get to the bottom of some very complex stories and illuminate the characters involved and the very human dynamics of their interaction.

Cons

• Morgan is not a deep subject matter expert like Yergin, and it shows in his analysis. He does a fine job explaining the technical aspects of growing and trading staple crops, but in many instances his subjective assessment of situations seems off to me.


• He also writes with a vaguely accusatory tone that I find irritating and not constructive - e.g. when complaining that the global grain traders have more market information than the U.S. government, or that the global grain trade lacks transnational regulation. What do you propose instead - a benevolent supernational trade regulator?


• Writing is not great - the narrative is jumbled, and the prose itself is sometimes unnecessarily wordy or awkward.


• Out of date - it was first published in 1979, and has barely been updated since (the re-publishers have a trite note on the back that "little has changed' since the initial publication, but developments over the past 3 decades surely merit a similar treatment).

Overall, recommended as a history of the grain trade, but only because it appears to be the best available - I wouldn't give it top marks in the absolute sense.

Adaptation to center stage

One of my favorite recent papers is by Michael Roberts and Wolfram Schlenker (regular readers may have noticed me regularly plugging it here, here, here, here, and here). Congrats to Michael and Wolfram on being mentioned prominently by The Economist in this week's long article on climate adaptation.

The entire article is pretty good and worth a read, particularly for its dogged effort to parse out climate impact and adaptation, and subsequent honesty where this proves impossible. For example:

Melissa Dell of the Massachusetts Institute of Technology and her colleagues argue that in developing countries GDP growth has been lower in hotter years than in cooler ones. This may carry over into longer-term increases in temperature. The mechanism is obscure: it may simply be that overheated people work less hard. That can be seen either as adaptation or as a worrying impact, slowing down the economic growth which is the surest foundation for other, more positive adaptations.

Not only is adaptation hard to distinguish from impact, investments in response are harder to classify:

Whereas investments in mitigation are fairly easy to understand—build windmills not coal-fired power stations, and so on—those in adaptation are harder to grasp. Action on climate bleeds into more general development measures.

The article overall is pessimistic

The fight to limit global warming to easily tolerated levels is thus over.

and while I wish I disagreed, and hold out for better-than-expected outcomes from Cancun this week, my inner skeptic and pragmatist are pushing me hard to shift focus - professional and personal - toward adaptation.

Another cut in crop forecasts

U.S. crop production forecasts were slashed again this week:

The agriculture department on Tuesday cut estimates of US corn yields for a third successive month, forecast record soyabean exports to China and warned of the slimmest cotton stocks since 1925.

“The combined production shortfalls and dramatic potential stock drawdowns mean a much tighter supply picture than just a few months ago,” the agency said in a separate grains report.

Benchmark Chicago corn futures soared above $6 a bushel for the first time since August 2008, before ending lower.

I'm looking breathlessly to Michael Roberts for the more granular data analysis he promised; this year could well be a preview of agriculture in a warmer world of the future.

In other unfortunate news, most of the $20 billion of food aid that was pledged last year has failed to materialize, and the probability of inspiring U.S. leadership on the issue has fallen substantially after the recent mid-term elections.

Dollar driving commodity prices - for now

Via MR, James Hamilton at Econbrowser shows that the falling dollar - probably driven by quantitative easing - seems to be the main driver of commodity price increases over the last two months. The good news is that monetary policy seems to be working. The bad news is that I don't think we can expect this pure relationship to last for long - too many other drivers on the supply and demand sides are in play - so its value as a barometer for the Fed is probably short-lived.

Update: Dollar is driving metal and hydrocarbon prices, that is - agricultural commodities have more volatile supply.

Highest climate ROI = family planning

Suppose you had $1 million to spend on tackling climate change. How would you spend it to get the best bang for your million bucks?

Would you spend it on stopping the slash-and-burn of forests? Perhaps on switching to nuclear energy? More energy-efficient buildings? Building cleaner power stations?

According to a recent paper by David Wheeler and Dan Hammer, climate change experts at the Center for Global Development, the answer is (drum roll): you would do much, much better to spend your money on a combination of family planning and girls’ education in developing countries.

That's Owen Barder, reporting on a Copenhagen Consensus-like analysis (in output, not methodology) on climate change mitigation. According to the analysis, the killer combo of family planning and girls' education is ~4x as cost effective as reducing deforestation, ~6x better than nuclear and almost 10x better than CCS.

An interesting thought explored in the comments is whether this would be more impactful in poor countries (high potential to reduce fertility but tiny per capita emissions) or rich countries (little unmet demand for family planning, but much larger carbon footprints). Apparently the two are similar (at least the U.S. is).

As Owen acknowledges, there are limitations to this approach, but at the very least this appears to be a solid analysis with a thought-provoking conclusion.

Precipitation and political determinism

Or, as Tyler Cowen puts it, a rainfall theory of democracy:

Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies.

... and now brace yourself for the awesome use of econometrics...

An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

Sad news: SO2 is dead

Tim Haab reports from the Heartland that the teetering SO2 cap and trade market is "Elvis dead."

The story goes something like this: The SO2 market was designed as if SO2 was a uniformly mixed pollutant. This made trading easier. One ton of SO2 in Ohio could be traded for one ton in Illinois. But, the impacts of each of those tons is different. Those states who absorbed a disproportionate impact from SO2 trading sued the EPA. Congress issued the Clear Air Interstate Rules limiting interstate trades of SO2. SO2 prices crashed. EPA lost the lawsuit: Must scrap the SO2 market and start over. SO2 market dies quietly.

Leaving us without a textbook example of market-based environmental policy... and that is the least of it.

It's all about messaging

Speaking of farmers and climate change, Chris Clayton highlights has an interesting story from a climate-skeptical Kansas town that's nevertheless reduced its energy use by 5% from baseline (which is a lot).

You don't make a case to do something in Kansas by saying Al Gore backs it, but you can reshape the message and get the same result.

Climate and Energy Project looked at what it would take to get Kansans to overcome their skepticism about climate change.

So the (Climate and Energy) project ran an experiment to see if by focusing on thrift, patriotism, spiritual conviction and economic prosperity, it could rally residents of six Kansas towns to take meaningful steps to conserve energy and consider renewable fuels.

The most resonant themes were thrift (i.e. efficiency), reducing dependency on foreign oil, green jobs and "creation care":

The obligation of Christians to act as stewards of the world that God gave them, even creating a sermon bank with talking points they could download.

This is probably even much more effective than arguing that rising temperatures from climate change will hammer yields.

Heat and crop yields in 2010

This may be premature, but I'm very tempted to award a gold star for clairvoyance to Michael Roberts, whose research on the effect of heat on crop yields I've blogged here and here. Here he is on August 12:

[Current temperatures] are still rising fast. If this keeps up for a few more days I'd say yields will get hammered.

(to give credit where credit is due, the market may have seen the same thing)

Anyway, fast forward to last week, the October forecasts for wheat, corn and soy are all well below the September forecasts (although USDA puts a bizarrely positive spin on it). As Michael's chart below shows, the September forecast is almost always very good, and revisions are generally upward, not downward, so something funny happened this year, and late heat seems to be a very strong hypothesis.
Michael is investigating the more detailed data and I hope will post any findings as they arise. As I mentioned before, if it was the heat, it will be very valuable to prove and communicate this to stakeholders in agriculture, some of whom have taken very skeptical views toward climate change and its impact on them specifically.

Food price spikes in unexpected places

Russian wheat, sure, but I never saw Korean cabbage coming:

One head of cabbage can now cost over 11,000 won ($10), more than pork and up from 2,000-3,000 won a year ago (see chart). Kimchi is now being dubbed keum-chi, the first syllable being Korean for gold.

The triggers seems to be the classics - poor harvest, perhaps exacerbated by hoarding - and I think it would be a bridge too far to connect this definitively to broader trends of global food price inflation, climate change, etc. But it is becoming a local political issue:

President Lee Myung-bak says he will be getting his personal stash from Western producers, earning him comparisons to Marie-Antoinette from South Korea’s numerous and critical bloggers.

... and I think it is worthwhile to keep track of these sorts of things.

Meta-report on Potash takeover

Felix Salmon pulls together what he likes to call a report report report on the Conference Board of Canada's report on various Potash Corp takeover scenarios, and the media's coverage thereof. The punch line is that

A successful takeover of Saskatoon-based Potash Corp could slash the province’s revenues by at least $2 billion over the next decade while having little or no net effect on employment, according to a report commissioned by the province.

... but a takeover by Sinochem would be far worse, with potentially foregone tax revenues of more than $10 billion over the next ten years.

Potash Corp's CEO has been doing a lot of talking, but I find it impossible to believe that a Sinochem bid could ever be politically feasible, so unless another multi-national bidder emerges, he won't be independent for much longer. That said, the market is still trading higher than BHP's $130/share offer price so a critical mass of people does seem to believe someone else - or another higher bid from BHP - is still out there.

Military goes renewable

From the NY Times, this might work:

Last week, a Marine company from California arrived in the rugged outback of Helmand Province bearing novel equipment: portable solar panels that fold up into boxes; energy-conserving lights; solar tent shields that provide shade and electricity; solar chargers for computers and communications equipment.

The 150 Marines of Company I, Third Battalion, Fifth Marines, will be the first to take renewable technology into a battle zone, where the new equipment will replace diesel and kerosene-based fuels that would ordinarily generate power to run their encampment.

But this is preposterous:

The Air Force will have its entire fleet certified to fly on biofuels by 2011 and has already flown test flights using a 50-50 mix of plant-based biofuel and jet fuel; the Navy took its first delivery of fuel made from algae this summer. Biofuels can in theory be produced wherever the raw materials, like plants, are available, and could ultimately be made near battlefields. [emphasis mine]

So instead of sending truckloads of diesel fuel to a war zone, the military will in the future construct a mini-scale bio-refinery, then plant, grow and harvest a climatically appropriate fuelcrop to fuel its trucks and helicopters?

I wish Company I the best of luck.

Cash for Clunkers failed

Remember how Cash for Clunkers worked (even though it was really expensive)? Actually it didn't. Sucks.

China's rare earth monopoly: long-term and short-term

In the wake of China's alarming decision to block rare earth exports to Japan, FP Passport published a longer and richer than usual post on whether China is making a rare earth power play, which is a helpful update on the latest global scenario.

As usual, some of the most insightful and prescient commentary came from Geoff Styles, a month ago already:

China's efforts to capture higher returns and more of the value-added for these scarce materials shouldn't surprise anyone; it's basic economics. OPEC tried this strategy in the 1980s, when it built export refineries in the Middle East and bought existing ones elsewhere. This didn't work out very well, because it contributed to a persistent glut of global refining capacity that, with the exception of a few standout years, generally benefited consumers more than producers. China could experience something similar in rare earths, once new, non-Chinese sources are brought online--assuming they are. Mining and processing such deposits entails large capital costs that, once invested, can set up a classic boom-and-bust commodity cycle. Unfortunately, the prospect of a future rare earth glut will be of little comfort to makers of wind turbines, advanced car batteries, and thin-film solar cells for the next several years, at least.

The OPEC comparison is interesting and relevant for the long-term view on rare earths, which are physically not that rare, just difficult and expensive to process. But Geoff is also right that in the short term, China may have a genuine squeeze. And if you believe this report (referenced by FP) that rebuilding the U.S. domestic industry would take 15 years, the short term doesn't look that short after all.

Nile water politics

This NYT article nicely captures the latest on Nile water politics. In sum:

• The current treaty guaranteeing 80% of the flow to Egypt and Sudan is a legacy of British colonialism


• Egypt views any reduction of flow to itself and its 80 million people as an existential threat, and rejects any such proposals out of hand


• Five of the seven upstream countries have signed a new Nile accord which requires a simple majority to approve projects, while Egypt insists on retaining veto rights over any project in any country


• Egypt believes it has the World Bank in its pocket on dam approvals, but worries that agricultural projects will not only soak up more water but also bring Arab and Chinese investors with their own clout into the fight


• Experts believe there is large water efficiency upside both upstream and downstream

It's hard not to be sympathetic to the seven countries who are still holding the short end of the stick imperialism handed them; on the other hand, in Egypt it's, if not life and death, a matter of the utmost political importance. Ethiopia's prime minister is right that it's not a zero-sum game, given the efficiency upside, but as in so many other parts of the world, at a market price of free, not enough stakeholders will be incentivized to capture it.

Moon shots and electric vehicles

Thomas Friedman on "moon shots":

China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience…; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry...

Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.

I'm not the biggest Friedman fan - he too often glances over important nuances - but he has a gift for stating core ideas in powerful ways, like the above. He devolves into simplicity here too:

The country that replaces gasoline-powered vehicles with electric-powered vehicles — in an age of steadily rising oil prices and steadily falling battery prices — will have a huge cost advantage and independence from imported oil.

If the economics were such a home run, it wouldn't take so much publicly funded start-up R&D to get this going - in fact, while I agree the prices of oil and batteries are moving in different directions, they're starting from such divergent places that they may well not cross any time soon. Batteries currently cost ~3x what they'd need to to be competitive, and Exxon - not the world's likeliest electric car revolutionary - has the world's best technology for the thin-film plastic separators that are the main components.

Especially given China's latest rare earths antics, we should also be worried about trading strategic energy dependency on one commodity (oil) for dependency on others.

That said, I believe Friedman's overall point on moon shots is spot on. My father (a scientist) and I disagree over the extent to which publicly funded basic science research enabled the technological boom of recent decades (think computers, the Internet, cell phones, biotechnology, etc.), but it certainly played some part, and skimping on this type of investment is a short-term decision with unpleasant long-term implications.

Hat tip Chris Blattman.

More food price volatility drivers

Upon further reflection on Chris Blattman's rare dud, here are a few more (slightly overlapping) potential drivers of food price volatility in the future. Please note that I'm not saying these will definitely cause higher food price volatility in the future, only that it is very easy to believe that they might.

• Biofuels and bioenergy: An additional source of demand growth - potentially very large - that could keep demand at the very edge of supply capacity.


• Stronger links to energy prices: Energy prices have always been linked to agricultural input costs since the most widely used fertilizer (nitrogen) is generally made from natural gas. More recently ethanol has become at times the marginal buyer of corn (Bruce Babcock at CARD did some nice research demonstrating that ethanol was the marginal buyer from late 2007 to mid 2008; I couldn't find a link to the paper, but all you need to do is look at the high correlation between actual corn prices and break-even prices for ethanol production). If this continues - and it may well, particularly when oil prices are high - then volatility in oil prices will be transmitted to food prices more than in the past.


• Speculation: That old bugbear; I personally am more skeptical about this one, as longtime readers will know, but the former head of IFPRI isn't, and objectively I'm no more likely to be right than he is.
  

Update: Michael Roberts responds and reprimands:

Here Chris seems to talking as much about climate science as economics or politics. He has also stepped onto a pet peeve of mine, common among some economists, which is ascribing personal views as truisms stemming from the branch of social sciences in which one specializes. It's not quite as bad as Steven Levitt pontificating about global cooling, but it reeks of that kind of professional arrogance. If you're an academic and are going to start asserting scientific truisms you need to be more specific about the underlying science.

He also points out a few factors not yet on my list, which I'll paraphrase here:

• Globalization is not irreversible: Think about how surprisingly globalized the world became during 1870-1914, only to regress drastically following World War I and the Great Depression.


• Shifts in comparative advantage due to climate change, which Michael is "convinced" of:
  

  That is, [climate change is] going to shift where things are grown. A lot. It's also likely to change global quantities, but that's hard thing to put a finger on (i.e., model convincingly). With that much change going on, we should worry at least a little bit, and probably a whole lot, about how the kind of turmoil these changes will cause. Loss of comparative advantage is just the kind of thing that brings about bad policy response.

• Uncertainty itself can exacerbate market volatility, and uncertainty about the future is high, not just about long-term commodity prices, but also about the direction of the world economy and shifts in agricultural production due to climate change.

Do food prices cause "food riots"?

The usually outstanding Chris Blattman has posted some spotty analysis of the recent journalistic coverage of food riots in Mozambique, which he finds "shallow and alarmist." I would have commented, but many have already done so, so rather than pile on I'll just articulate my own take here. Like commenter @Jonomist, I think his punchline that we should be more careful attributing causality is probably defensible, but some of his arguments are not.

Here’s what a closer look at your economics and political science can tell you.

Expect price volatility to fall over time. Globalization and growth should reduce price spikes in future. More countries are producing crops. Climate shocks in Argentina are not that tied to climate shocks in Russia or China, and so price volatility from supply shocks should be going down. Falling transport costs also mean that more substitutes are available, further reducing price volatility. So things should be getting better over time, not worse, especially if trade allows countries to diversify their diet. Envision a future of diminishing instability.

This is a dangerously superficial argument, reminiscent of arguments that a more integrated global financial system would mitigate systemic risk - remember how that turned out? It's what a textbook analysis would say, but lacks grounding in the realities of these markets.

• Empirical data (most recently the price spikes of 2008 and now 2010) don't bear this out, at least in retrospect to date.


• Many agricultural stakeholders - including private companies both producing and buying food, as well as multi-laterals such as the FAO and the World Bank - are deeply concerned with price volatility in the future. (My own view is that we can't yet tell if average volatility will increase to a higher permanent plateau, but most players believe this is much more likely than the opposite.)


• Growth in both population and income is driving strong growth in agricultural demand that is unlikely to abate soon, and pushing the world toward the edge of its current supply capacity. Production can grow too (Ehrlich and Malthus were wrong) through increasing yields through research and bringing more land under cultivation, but the former is longer-term and the latter runs into seriously diminishing marginal returns. My personal belief is that we will be able to feed 9 billion people a more modern diet by 2050, but there will be bumps along the way, and any time demand nears supply capacity, the potential for price volatility increases significantly.


• Climate may become more unstable as climate change progresses, and climate change could also adversely affect baseline agricultural productivity, as Michael Roberts' excellent paper has shown and the market seems to believe.


• As several commenters noted, national policies play a substantial role in agricultural prices (notice how the wheat market responded to the Russian wheat export ban), and this intervention seems unlikely to diminish (especially in light of the above factors) - if anything it is likely to exacerbate any increases in underlying volatility caused by long-term demand growth and short-term supply shocks.

A few smaller nits:

Look to local policy, not global markets, for the real instability. Bread prices climbed 30% in Maputo, apparently due to Russian wildfires. But global wheat prices have only risen 5%. Why the disproportionate effect? I wish I knew, except I haven’t a single report from the ground that points out the disparity, let alone one that searches for an answer.

Yes, global wheat prices have risen 5% "during August" - and more than 50% since June, as commenter Bernhard Brummer points out. Some of the blame goes to the NYT writer for not picking a better baseline, but it's not a hard thing to double-check.

Chris: For riots, look to poor policing, not poverty.
@Jonomist: Are fires caused by insufficient fire marshaling?

Exactly.

Chris' track record is too strong for him to need to redeem himself, but he does so anyway (I'm not sure if intentionally) through his next post on the quality of his commenters (who came through rapidly here).

Peak (or finite) helium

Via MR, are helium party-balloons the next commodity to spike? Apparently helium, which cannot be made synthetically or chemically, is subject to a serious market pricing distortion:

The US government established a national helium reserve in 1925, and today a billion cubic metres of the gas are stored in a facility near Amarillo, Texas. In 1996 Congress passed an act requiring that this strategic reserve, which represents half the Earth's helium stocks, be sold off by 2015. As a result, helium is far too cheap and is not treated as a precious resource.

Nobel prizewinner Robert Richardson thinks the government should

Get out of the business and let the free market prevail. The consequence will be a rise in prices. Unfortunately party balloons will be $100 each rather than $3 but we'll have to live with that. We will have to live with those prices eventually anyway.

I would love to understand the political reasons why this happened - the economic illogic is patently apparent, and I can't imagine it does much for national security either.

Market won't drive clean energy transition

Geoff Styles blogs a recent Science article explaining why the transition to cleaner fuels will take a long time.

Here's a clear and concise explanation from the top science journal in the country on why the transition to alternative energy won't--and can't--be quick, cheap or easy...

That's a crucial point for anyone who sees this energy transition driven not just by concerns about energy security and greenhouse gas emissions, but by notions of clean energy as the next big wealth-creating global trend, akin to the computer revolution. A kilowatt-hour or BTU does the same work, regardless of its source, so unless it can be produced for significantly less than from conventional sources, greener energy offers no productivity gains of the kind that have fueled the global infotech transformation.

Density and intermittency are both large disadvantages that many renewable energy sources must overcome... and even without these disadvantages, the article explains, the transition to current fossil fuels took half a century.

Pursuing renewable energy is a worthwhile goal (neither Geoff nor the author disagree), as is chasing energy efficiency, which is perhaps our most attractive short-term option to balance energy demand and supply. But I also agree that it's prudent to disregard the optimistic claims of those who believe things along the lines of "replacing oil will be the greatest commercial opportunity of our generation." It won't.

Pakistan floods and world weather patterns

Via MR, striking pictures of the flooding in Pakistan, which may have affected more than 20 million people and was apparently caused by the same weather patterns responsible for this summer's heat wave in Russia (and the next global food crisis?).

Remember that the Punjab is also a major wheat breadbasket, although it does not appear to be among the majorly affected regions.

Is it climate change's fault? Hard to say, honestly, since pinning any single weather pattern on climate change is impossible, although as the Economist article cited above says, it fits the pattern of increased extreme events we would expect with global warming.

Update: Apparently one fifth(!) of the country is underwater. You could infer this from the above picture but it hadn't occurred to me that it could be interpreted so directly.

Blaming and curbing food speculators

With wheat prices up 50% since June and Russia banning grain exports, the media is all over "the next food crisis." I'm disappointed that former IFPRI Director-General Joachim von Braun appears to lay much of the blame on those evil speculators.

The setting of prices at the main international commodity exchanges was significantly influenced by speculation that boosted prices. Not only are food and energy markets linked, but also food and financial markets have become intertwined – in short, the “financialisation” of food trade. There are increasing indications that some financial capital is shifting from speculation on housing and complex derivatives to commodities, including food.

von Braun is right to call for "accelerated public investment in agriculture." But I believe it's misleading to imply that speculation-curbing measures such as requiring larger capital deposits of traders will really help moderate either prices or volatility. For prices, note how prices also rose in non-speculatable food commodities in 2008, and for the impact of speculation (a.k.a. liquidity) on volatility, just remember the onions.

I'm not 100% sure I'm right on this, but I would have appreciated a more robust substantiation of the claims about speculation's impact from someone of von Braun's stature.

Sea rise not that scary?

That's the case that climate adaptationist Bjorn Lomborg (don't call him a skeptic) makes at Project Syndicate, because we've dealt with it already:

Imagine that over the next 70 or 80 years, a giant port city – say, Tokyo – found itself engulfed by sea levels rising as much as 15 feet or more... Without a vast, highly coordinated global effort, how could we possibly cope with sea-level rises on that order of magnitude?

Well, we already have. In fact, we’re doing it right now. Since 1930, excessive groundwater withdrawal has caused Tokyo to subside by as much as 15 feet, with some of the lowest parts of the downtown area dropping almost a foot per year in some years. Similar subsidence has occurred over the past century in a wide range of cities, including Tianjin, Shanghai, Osaka, Bangkok, and Jakarta. In each case, the city has managed to protect itself from such large sea-level rises and thrive.

Lomborg cites research research claiming that over 95% of the world's coastal population is urban, making rising oceans no big deal.

A 20-foot rise in sea levels (which, not incidentally, is about ten times more than the United Nations climate panel’s worst-case expectations) would inundate about 16,000 square miles of coastline, where more than 400 million people currently live... [and] the vast majority of those 400 million people reside within cities, where they could be protected relatively easily, as in Tokyo.

Off the top of my head, I'd challenge this with Bangladesh, which has 160 million people and is very low-lying:

Is it really fair to assume Dhaka has an easy out just because it's "urban"? Maybe Jakarta has coped with rising seas, but Indonesia's per capita GDP is still 3x that of Bangladesh.

Lagos and Karachi are two other poor coastal megacities that would be worth doing the same analysis for.

Update: I just had dinner with someone from Bangladesh who confirmed that the idea that rising seas won't hit Bangladesh hard is preposterous. First, there are millions of people living in low-lying, non-urban areas (especially hundreds of islands in the Ganges Delta). Second, much of the productive agricultural land is similarly low and is already suffering from soaring salinity in many areas. So it seems that the underlying analysis is weak, and Lomborg himself should be doing better quality control of the sources he chooses to cite.

Update 2: A few relevant numbers to refine our back-of-the-envelope: 46% of Bangladeshis live within 10 meters of the average sea level, and the country is only 27% urban. So it seems very unlikely that Lomborg's math that "only ~15 million people would need to be relocated [over the course of the century]" can possibly be right.

Cow on motorbike

Happy Friday!!

Hat tip Chris Blattman.

Market believes heat hurts crop yields

The market believes what Michael Roberts' popular paper showed about crop yields - higher temperatures really hurt.

Corn futures rose the most in almost two weeks and soybeans gained on speculation that the recent Midwest heat wave will mean smaller production than the record crops predicted today by the government.

August has gotten off to the second-warmest start since 1960, T-Storm Weather LLC said today in a report. Another forecaster, Commodity Weather Group LLC, said about 25 percent of the U.S. soybean-growing area won’t get enough rain for proper plant development over the next two weeks, and that the dryness could harm a third of the Midwest should rain miss sections of Illinois this weekend, as expected.

“The crops are going downhill rapidly in parts of the Midwest and South,” said Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis. “Our farmers are already preparing for corn yields that may fall 5 percent to as much as 10 percent from earlier field samples.”

Looking for the silver lining, might this influence the farm lobby's stance on climate change?

Via Michael at Greed, Green and Grains.


Update: I'm struggling a bit to square this with USDA predictions of record U.S. corn production... I wonder if those forecasts were based on outdated inputs (like, perhaps, "earlier field samples").

Price rises in non-speculatable food commodities

I recently had a contentious discussion over the extent to which financial speculation caused the food price run-up of 2008 (and prior years). I am skeptical that speculation was a major culprit, and I was unable to remember the specifics of the argument that prices rose similarly in commodities which are not index-traded. For future reference (my own as much as my readers'), I tracked it down in this paper recently released by the OECD. (emphases are mine)

If index fund buying drove commodity prices higher then markets without index fund investment should not have seen prices advance. Again, the observed facts are inconsistent with this notion. Irwin, Sanders, Merrin (2009) show that markets without index fund participation (fluid milk and rice futures) and commodities without futures markets (apples and edible beans) also showed price increases over the 2006-2008 period. Stoll and Whaley (2009) report that returns for Chicago Board of Trade (CBOT) wheat, Kansas City Board of Trade (KCBOT) wheat, and Minneapolis Grain Exchange (MGEX) wheat are all highly positively correlated over 2006-09, yet only CBOT wheat is used heavily by index investors. In a similar fashion, Commodity Exchange (COMEX) gold, COMEX silver, New York Mercantile (NYMEX) palladium, and NYMEX platinum futures prices are highly correlated over the same time period but only gold and silver are included in popular commodity indexes. Headey and Fan (2008) cite the rapid increases in the prices for non-financialized commodities such as rubber, onions, and iron ore as evidence that rapid price inflation occurred in commodities without futures markets. While certainly instructive, the limits of these kinds of comparisons also need to be kept in mind. Bubble proponents have pointed out that commodity markets selected for the development of futures contracts may be naturally more volatile than those commodities without futures markets.

The paper also includes more far more statistical including the latest Granger causality analysis, which is more rigorous, but also in my view less effective than anecdotes like the above in many informal discussions. Their overall conclusion is unequivocally in line with my view that

... at this time, the weight of evidence clearly suggests that increased index fund activity in 2006-08 did not cause a bubble in commodity futures prices.

In related reading, here are previous posts citing Thomas Malthus and Darrell Duffie on the benefits of speculation in food markets, and here is Scott Irwin (one of the OECD paper co-authors) last year on why index speculators didn't break the wheat market.

The fragile credibility of cap-and-trade markets

This isn't fresh news, but it's a powerful illustration of how sensitive cap-and-trade systems are to loss of political credibility. The SOx cap-and-trade market was a long-standing success story and talisman for those who sought to establish a similar, broader system for GHG emissions to curb climate change.

2005:

The current problems in the acid-rain market stem from 2005, when the EPA, with the backing of many utilities and environmental groups, announced major new reductions in smog-forming and soot-producing emissions, and expanded the reach of the cap-and-trade system in more than two dozen, mostly Eastern, states.

2008:

In response to lawsuits filed by a handful of utilities and North Carolina, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the EPA had overstepped its authority...

In response to the ruling, prices for the pollution allowances plunged to $130 a ton. Utilities held off on projects to clean up their plants.

2010:

Last week, the EPA issued new rules to comply with the court's decision. The new program will limit the use of the market and instead require most of the emission reductions to come from changes at the plants themselves. And millions of allowances that utilities now hold can't be used under the new program, which will issue its own allowances.

And unsurprisingly, prices have now fallen to essentially zero. A powerful cautionary tale.

74% of BP spill eliminated

The good news - an impressive 74% of the oil from the Deepwater Horizon spill is estimated to have "already evaporated, dispersed, been captured or otherwise eliminated":

A government report finds that about 26 percent of the oil released from BP’s runaway well is still in the water or onshore in a form that could, in principle, cause new problems. But most is light sheen at the ocean surface or in a dispersed form below the surface, and federal scientists believe that it is breaking down rapidly in both places.

That bad news is that 5 billion barrels of oil was a lot to start with.

Does Fairtrade take away the upside?

An interesting tidbit in an article about the mystery (well, not any more) trader who bought all of Europe's cocoa:

Barbara Crowther, a spokesman at the Fairtrade Foundation, said that no farmers in West Africa would benefit from the higher prices. She said: "This speculation only serves to increase volatility and uncertainty. Part of the problems in rent years have been the lack of investment in improving cocoa farms. But the farmers have already been paid a set price – none of this money will filter down to them."

If this is true, it points to a serious potential flaw in Fairtrade programs - the inability of participants to capture upside profits from price spikes. For many commodities, profits are concentrated heavily in a few spikes on a through-cycle basis, so missing out on those spikes is a big blow. Maybe Fairtrade compensates farmers in some way for the volatility premium it could be harvesting, but I'm skeptical until someone shows me.

Strange disaster math

Alex Tabarrok at Marginal Revolution:

Number of birds killed by the BP oil spill: at least 2,188 and counting.

Number of birds killed by wind farms: 10,000-40,000 annually.

Number of birds killed by cars: 80 million annually.

Number of birds killed by cats: Hundreds of millions to 1 billion annually.

Don't worry there is some good news.

Number of birds killed by fisheries: tens to hundreds of thousands annually (fortunately for the birds, some of these fisheries are now shut down).

Bio-remediation

So if we could just put the dead zone and the oil spill together...

A big factor slowing oil breakdown is that oil doesn't contain much nitrogen or phosphorus, both of which are needed for good bacterial growth. Enter bioremediation, where fertilizer is added to encourage natural bacteria. First tried in the 1960s, it evidently works. One 2002 study showed that adding just 0.25 percent fertilizer to oil on a lab-simulated beach quintupled the natural biodegradation rate. Tests in 1994 in Delaware Bay, which is already rich with bacterial nutrients, showed fertilizer doubled the rate of oil degradation in shallow waters. The same year, scientists fighting a spill on a beach near Haifa, Israel, reported that bioremediation had reduced oil contamination 88 percent in just four weeks.

From the Straight Dope, answering the question, "Did nature clean up most of the Exxon Valdez oil spill?" The conclusion:

Do oil spills mostly go away on their own? Yes. Does that mean we’re better off leaving them alone? Of course not.

Reminders of the crop yield treadmill

Recent journalistic pieces on wheat rust and brown streak (a virus which infects cassava) remind us that agriculture is a constant battle against evolving pests of many kinds. So when we think about declining funding for agricultural research and try to assess induced innovation, we need to keep in mind that a certain level of research and progress will be required to maintain yields at their current level, let alone improve them. We are on a treadmill, not standing still.

No oil wars in Latin America?

Via Chris Blattman, resource curse academic Michael Ross has a new paper which finds that in Latin America, unlike the rest of the world, oil wealth seldom leads to secessionist conflicts.

In the rest of the world, oil heightens the danger of both “governmental” conflicts (over control of the existing state) and secessionist conflicts (to form new states); but in Latin America, oil is only linked to governmental conflicts. This is not because Latin American petroleum has unusual properties, but because the region is uniquely “secession-proof”: there have been no separatist conflicts in Latin America for over a century. I explore two possible explanations for this anomaly: the region’s long history of sovereign statehood, which may have caused national borders to become more widely-accepted; and obstacles to the mobilization of indigenous groups along ethnic lines.

As a few of Chris' commenters point out, I think the obvious counterexample is Bolivia, where there are genuine and long-standing secessionist (and ethnic) tensions between the poorer, more indigenous highlands and the wealthier, whiter lowlands (where, incidentally, most of the natural gas is to be found). It is to be seen how these ultimately play out.

It also reminds one how sample size is an such obstacle to any sort of meaningful statistical analysis in international relations or development.

A meta-verdict on commodity speculation

A new OECD meta-study has concluded that financial investors (a.k.a. the dreaded "speculators") were not largely responsible for commodity price run-ups in 2008. The two main arguments will be familiar to regular readers.

Higher futures prices could have sent a signal to commodity producers, who then decided to hoard their stocks rather than sell them in the cash market. The shortage might then have pushed spot prices higher. The evidence, however, is that inventories were falling, not rising.

An even more telling argument is that commodities without futures markets (apples, edible beans) or futures markets where index funds did not get involved (milk, rice) also saw price rises during 2006-08. Nor was there any correlation between the size of index funds in particular commodities and the price rise for those raw materials.

The study also draws the intuitive conclusion that larger financial participation probably lowered volatility, rather than raising it.

From the Economist (subscription required).

P.S. The same issue has a number of good pieces (all subscription required) on topics like Zimbabwe's Marange diamond field (prior to latest Kimberley ruling), the success of environmental activists in influencing the palm oil supply chain, and how chimps go to war over land rather than females.

BP foresaw its doom

This would be hilarious if it weren't so sad:

Offshore Oil Strike is a genuine BP-endorsed board game from the 1970s, in which players manage an offshore drilling operation. Hazard cards hinder gamers with clean-up costs and rig explosions.

The fact that the current scenario could be roughly foreseen decades ago in a board game, let alone the type of sophisticated scenario-planning exercises oil companies (Shell in particular) are known for, leads me to agree with Michael Roberts that

... BP was in fact irrational when it came to prevention efforts. The risks and potential damages to their bottom line profits were, objectively I suspect, way larger than BP's CEOs thought, despite warnings from their engineers.

7 ways to overcome the resource curse

The Roving Bandit summarizes a new survey article by Jeffrey Frankel highlighting seven ways to overcome the resource curse.

1. Indexation of oil contracts – Contracts between oil companies and governments could easily (but usually don’t) have explicit clauses to deal with global price volatility - sharing the downside and upside risk.


2. Hedging of export proceeds – Simply buy insurance against low oil prices, like the Government of Mexico has done. Easy.


3. Denomination of debt in terms of oil – i.e. promise to repay a quantity of oil rather than a dollar amount. This insures the borrowing government and transfers the price-risk to the lender.


4. Chile-style fiscal rules – Chile managed to save its copper boom and spend its way through the global recession by having an independent fiscal panel make assessments of the medium-term price and output gap – and tell the government how much they were allowed to spend.


5. A monetary target that emphasizes product prices – If the Central Bank has greater political independence than government coffers, monetary policy could be geared towards building up higher-than-otherwise-desirable stocks of foreign currency reserves – in order to ensure the savings aren’t raided.


6. Transparent commodity funds – The challenge is in the transparent part.


7. Lump-sum distribution – Last but not least, my favourite. Just give people the money.

These are all valid ideas, but in many cases (e.g. #4) the devil is really in the implementation (or the political economy, if you prefer). I'm a fan of the more thorough treatment in Escaping the Resource Curse, although from a quick glance it looks like this paper covers much of the same ground and sources in a more concise fashion.

A few BP links

Just got back from two weeks of vacation, including some time in South Africa for the World Cup (which was fantastic, by the way, except for the elimination of a promising U.S. side by Ghana, and the subsequent elimination of Ghana - the last African team - by the hand of God Luis Suarez).

Anyway, back to the real world... I've spent the morning reading through my RSS feeds and here are a few BP-related links that I don't feel the mental energy to write full posts on.

1. "And if we aren’t careful, we will encourage companies that have enough money for collection to leave the drilling to those that don’t." (Richard Thaler, via Tyler Cowen)


2. Don't forget, BP also gave the world Ayatollah Khomeini (via Chris Blattman)


3. Container cap no longer on?


4. BP now more evil than Goldman Sachs


5. BP spills coffee

Addendum: Here's the Economist (subscription required) on the Obama deepwater drilling ban:

The people it presumably intends to protect—the residents of south Louisiana, whose fisheries and shorelines are being fouled by BP’s still-gushing Macondo well, and the oilfield workers who could be at risk from another disaster—are probably its loudest critics. Nearly two out of three Americans support the ban, according to one recent poll, but gulf coast residents are split down the middle.

The right attitude

I just started Gregory Clark's A Farewell to Alms, which I was already excited about, largely because Tyler Cowen reviewed and liked it and wrote a series of "Book Forum" posts, which I intend to follow in parallel.

I'm further encouraged by this nicely-worded sentiment from the preface.

Doubtless some of the arguments developed here will prove over-simplified, or merely false. They are certainly controversial, even among my colleagues in economic history. But far better such error than the usual dreary academic sins, which now seem to define so much writing in the humanities, of willful obfuscation and jargon-laden vacuity. As Darwin himself noted, "false views, if supported by some evidence, do little harm, for every one takes a salutary pleasure in proving their falseness, and when this is done, one path towards error is closed and the road to truth is often at the same time opened." Thus my hope is that, even if the book is wrong in parts, it will be clearly and productively wrong, leading us toward the light.

This is a great attitude - for a scholar, for a book, and definitely for a blog.

BP blues

Despite a reportedly successful meeting with President Obama, BP can’t be too happy. It still has to find the money to fund its $20bn commitment, that by the way is in no way a cap on its liability (Obama called it “a good start” and “not a cap.”). Credit markets are currently pricing in a 36% chance of default within the next five years(!).

Afghanistan's great hope?

Apparently Afghans are quite excited about the recent $1 trillion estimate of the value of the country's mineral reserves.

In a news conference primarily with Afghan reporters, President Hamid Karzai’s spokesman, Waheed Omar, called the report “the best news we have had over many years in Afghanistan.”

“This will improve drastically the lives of the Afghan people, the economic status of the Afghan people and to see that positively, that will unite the Afghan people,” he said.

It sounds like an awful stretch to me. Leave aside for a moment that the investment preconditions like physical security, governance infrastructure are far from the level required to attract significant private capital, as FP Passport points out. The more fundamental question is how often (other than notable exceptions) has mineral wealth really translated to stability, political unity and sustainable economic growth in developing countries?

Short-term disaster, long-term hope

The ugly stories and pictures of the Deepwater Horizon spill's impact on the Gulf Coast ecosystem and economy are rolling in. But while the short-term prospects look grim, reason for longer-term hope can be found in an analysis of Mexico's devastating Ixtoc oil spill (an anagram for "toxic," I noticed) of 1979.

Soto, who followed the fish and shrimp population off Mexico closely, found to his surprise that for most species the numbers had returned to normal within two years.

"In 1979, the islands around Veracruz looked like black doughnuts, there was so much oil clustered around them,'' he remembers. "It was 12 to 15 inches thick in some places. But as I came back over the years, it got harder and hard to find. After five to seven years, it was hard to see the outline, and by 2002, an unsuspecting person would have thought it was a rock ledge ... it was covered with algae and shells and just looked like a normal part of the environment."

Even under water, where the sun can't help the oil break down, nature subverts it, says Mexican marine biodiversity analyst Jorge Brenner. "If you visit the coral reefs in the Gulf of Campeche, the tar has been covered with sea grass, algae and sediment,'' he says. "You actually have to dig a little bit to find it, although it's definitely there."

The spill might also be, ironically, good news for environmentalists, although perhaps not across the board, as finite public attention and energy for environmental and sustainability issues is diverted from less acute (but still enormous) challenges like climate change.

The undiversified economy

... is vulnerable, even if historically successful:

Botswana’s economy contracted by 6.7 percent last year as revenue from diamonds plummeted, Central Bank Governor Linah Moholo said.

“Mining was hard-hit, with its share of gross domestic product dropping from 41.2 percent to 24 percent,” she said.

This succinctly summarizes the problem for Botswana. Although its growth record for decades has been impressive, it remains too undiversified. Diamonds and cattle remain large sectors of the economy. When diamond revenues plummet, the economic consequences are severe. Add in the HIV/AIDS situation with a contracting economy can quickly turn an African success story into another African Growth Tragedy.

Now, a 7% downturn amidst the greatest economic crisis in generations is not the end of the world, especially if you managed to average 9% annual GDP growth for over three decades. On the other hand, even the staunchest efficient market skeptics and industrial policy promoters would have to concede that "happen to have and focus your economy on a small basket of commodities that will outperform over the coming decades" is not a viable (or at least generalizable) economic development strategy to start with.

From the Stationary Bandit, via the Roving Bandit.