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.