Coinflation

I vaguely remember when pennies became worth less than the copper they contained; via MR, the same condition has spread to the nickel and beyond:

US five cent coins contain over 7 cents worth of raw material as of this afternoon, mostly copper and of course, nickel. If there is inflation, the prices of metal will increase, and the coin will have 8, 9, 10 cents worth of metal. Pre-1965 dimes contain over $2.42 of metal today, while pre-1965 quarters have over $6 worth of metal.

I wonder what they did to dimes and quarters after 1965, and whether the same is in store for the nickel. (While the penny, of course, should just be abolished.)

Commodity price passthrough, cotton edition

Here are some excerpts of alarmist journalism from the NYT:

A package of Oscar Mayer cold cuts. A pair of Nine West boots. A Whirlpool washing machine.

By the fall, people will most likely be paying more for each of them, as rising prices hit most consumer goods...

After trying to keep retail prices flat or even lower during the recession, Jones says prices for its brands will climb 15 to 20 percent by autumn.

... and here is Michael Roberts appropriately skewering that alarmist journalism.

Yesterday the near month futures price of cotton closed at $1.83/lb. That's pretty high, more than double the price of just a year ago. Before this year, I'm not sure [nominal] cotton prices ever exceeded $1.20...

How much do these high prices matter for the prices we pay for clothes?

Not so much. Consider that there is about 0.6 lbs. of cotton in a typical man's shirt. So that $1/lb increase in cotton prices over the past year means it costs an extra 60 cents to make the Brooks Brothers shirt for which I paid $40. On sale.

That should sound pretty familiar to regular readers who have seen the same trick with food prices.

Passing off 15-20% price increases as cost-driven when they are demonstrably not (at least for raw inputs) seems pretty risky and short-sighted. I can't speak much to the rest of the cost structure, although we are not exactly in a tight labor market in the U.S. either.

Picture of the Day: World of Snow and Ice

Via Tyler Cowen. This picture is a few days old. A reminder of how naturally variable weather can be (and thus how hard things like climate change are to track).

Better energy storage?

Via Geoff Styles, a very intriguing idea: Windfuels, i.e. "storing wind power in gasoline."

Doty Windfuels has been working on a system called RFTS, or Renewable Fischer Tropsch Synthesis. The process looks to use off-peak excess wind energy to recycle CO2 into standard fuels that work seamlessly in the one billion cars and trucks on the road around the world. The chemistry is fundamentally simple and well understood.

Geoff doesn't seem all that enamored of the idea (put off in part, he admits, by the inventor's excessive negativity toward seemingly all other energy alternatives). I'm a bit more positive. There's a lot to be said for building almost entirely on proven technologies (in this case, chemical pathways; the only step not commercialized is reducing CO2 to CO). Even if the economics get worse as other energy storage technologies like CAES begin to compete up the price of off-peak electric power, it certainly wouldn't be a bad thing for there to be one more storage technology in the mix. And even if this specific idea doesn't bear fruit, it encourages further investigation of storing off-peak power as chemical energy (rather than mechanical, e.g. compressed air, or thermal, e.g. molten salt), an avenue I hadn't thought of much, and one which makes a lot of intuitive sense.

Watch the crush spread

Trying to chase down cause and effect in energy and resource markets can be frustrating - it is hard to follow a linear path to a new, coherent equilibrium. Take, for example, Geoff Styles' recent line of thought on the impact of Egyptian unrest on renewable energy.

... since the protests started on January 25, and without any actual disruption in oil deliveries, the price of UK Brent crude... has climbed by around $5 per barrel and now trades solidly above $100.

... [Ethanol and biodiesel] stand to gain if oil prices are driven up by factors that don't also push up the prices of the commodities from which they're made [emphasis mine].

That last bit is critical, and can't be taken for granted. In late 2008 ethanol was clearly the marginal use of corn and corn became priced off of its value in use as ethanol, squeezing margins despite high oil prices. If biofuels come back in a big way, this dynamic is likely to kick in (leading, incidentally, to even higher food prices, not good for most people).

Who are the real cotton speculators?

The WSJ (and the InterContinental Exchange, for that matter) always seem so quick to jump on financial speculators as the cause of price rises in any given commodity. Cotton prices more than doubled from Dec 2009 to Dec 2010, and have risen another 20% in 2011.

The top cotton-futures exchange is clamping down on speculation amid soaring demand that has sent prices up, threatening losses for mills, commodity merchants and apparel producers.

... Over the past year, the number of cotton contracts outstanding has grown by 21%, aided by an influx of hedge funds and small speculators.

ICE is apparently worried, although I can't tell how much of this is journalistic dramatization.

In response, ICE on Thursday said it will increase its scrutiny of big positions from now on.

"Increase its scrutiny," huh? A pretty threatening step!

A few maxims for analyzing commodity price spikes. First, always look to supply and demand first. Second, as Paul Krugman reminds us, speculators can't sustainably increase prices without actually withholding physical supply from the market, so if inventories aren't increasing, be skeptical.

What do we find in this case? First, the supply-demand picture looks tight, as the WSJ itself acknowledges:

Low global stocks of cotton and growing demand, particularly from China, have caused concerns of shortfall in the fiber this year. Rains in Pakistan and India, the second-biggest grower, and recent floods in Australia have fed fears of a shortage.

Second, there is actually cotton hoarding going on at scale - by cotton farmers in China (via Krugman). That is physical speculation (seems morally reasonable when it's farmers doing it, and incidentally not subject to ICE position limits). Finally, political uncertainty makes commodity markets jittery, and Egypt is a major cotton exporter. I think there might be something going on there.

P.S. Egypt is indeed a major cotton exporter, but I was surprised to learn that in 2004, Benin, Mali, Syria, and Greece exported comparable volumes, and FAPRI doesn't even track Egypt for cotton. Based on price per ton from FAOSTAT, Egyptians do the high-end stuff.

Chicken meat discrimination

Via John Durant, I never thought to wonder what happens to all the dark meat?

There's no question that Americans overwhelmingly prefer white chicken meat to dark. We eat chicken almost 10 times a month on average... but on less than two of those occasions do we choose chicken legs, thighs, or drumsticks.

The historical answer is: to Russia.

... in the 1980s, when chicken consumption in the United States increased at a phenomenal rate, the poultry industry needed new outlets to absorb the growing numbers of discarded legs.

It was most fortuitous, then, that the Soviet Union collapsed in 1991, resulting in the relaxation of trade restrictions that had hindered commerce with the formerly Communist state. U.S. chicken exporters, eager to exploit this fresh market, were able to underprice virtually all other animal protein produced in Russia, and American dark meat flooded the country. The chicken legs became so popular that locals endearingly nicknamed them "Bush legs," after President Bush Sr.

The complication now is that Russia seems determined to put up quality-related trade barriers (spurious, to hear American exporters tell the tale), so poultry producers need either a new market abroad, or a revolution in domestic tastes.

I've always preferred dark meat, so I'm raring to go to the grocery store and pick up some discounted bone-in chicken thighs. Although I wonder if they're apples-to-apples cheaper than the whole rotisserie chickens which are currently my favorite (and stupidly cheap compared to other types of meat).