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.