Tyler Cowen's next book on food!

I saw Tyler Cowen live in DC tonight - a fun experience for those of you who are familiar with his written word. Most of the discussion focused on The Great Stagnation (a.k.a. TGS), but an exciting tidbit was that his next book will be on food and food economics. Especially given that agriculture recently surpassed climate change as my most-posted-on topic, I for one can't wait.

Cute analogy

Aluminum is to energy as grain is to water.

(Half courtesy of Laurence Smith's The World in 2050, via MR, and half courtesy of a conversation with a colleague.)

Web guide to radiation exposure

A colleague directed me to this online graphic, which aims to put different magnitudes of radiation exposure in context. While not taking anything away from the heroic efforts of the on-site engineers and technicians who are battling to prevent further meltdown, or how scary it must be to find radioactive iodine in your spinach, the (highly caveated) message seems to be that we're an order of magnitude or more from Chernobyl or any level of serious danger to populations beyond the immediate vicinity.

Robot harvesting strawberries

It's been a while since I posted anything (since 2010, in fact). So, via Ben Casnocha, here's a YouTube video of a robot harvesting strawberries. Here's a short advocacy documentary on migrant workers harvesting strawberries in California (and our robot is nowhere near ready for those conditions). Here's the AP study demonstrating that unemployed Americans don't want this job (notwithstanding, of course, that white people like to pick their own fruit). And here's Parke Wilde on the agricultural economics of strawberries, or why weather matters and yet sob stories should be taken with a grain of salt.

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.

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.

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.

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.

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.

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).

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.

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.

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.

Peak phosphorus: look underwater?

Speaking of Peak Phosphorus, one of Tyler Cowen’s “Julian Simon savvy” commenters (who “descended from farmers”) is also not impressed.

Oh, and peak phosphate? Please. There are deposits on the contintental shelves sufficient for 1,000 years or more. Some are in quite shallow water. The Onslow Bay formation in North Carolina contains about 5x the current proven world reserves, all lying in water less than 20 feet deep.

I have heard about these types of underwater phosphate deposits but don’t know enough about them to verify their size, or how much it costs to extract them (or if anyone is actually extracting at commercial scale yet). Perhaps they will become the oil sands of phosphates: almost unlimited resources but at a fairly high position on the cost curve. In theory this would function as a long-term price ceiling on phosphates (although not short-term, as 2008’s oil price run-up showed us).

Peak phosphorus? Meh...

Two FP Passport writers have a dire take on the world's supply of phosphates:

Our dwindling supply of phosphorus, a primary component underlying the growth of global agricultural production, threatens to disrupt food security across the planet during the coming century. This is the gravest natural resource shortage you've never heard of.

Yes, phosphorus is an essential agricultural nutrient, and yes mined phosphates are critical for phosphate fertilizer, and yes 90% of proven reserves are in five countries, and yes the U.S. is an importer (despite being one of those five countries), and yes the current mines are running out of the easiest reserves to mine. And yes there is the requisite group of scientists forecasting that we won't have enough in 30-40 years. Where I struggle with this Peak Oil type of static reasoning is that it doesn't take into account the dynamic economic dimension. Prices may (probably will) rise, but this will encourage more exploration, more marginal mines to be brought back online, and even more marginal reserves in current mines being produced. I can assure you from first-hand experience that even profitable phosphate mines have ample physical reserves they don't declare for economic reasons, and that when the world price rises, a lot more of your physical reserves become commercially viable.

While I disagree with their alarmism, I do find their ultimate appeal compelling.

We need to dramatically reduce the demand for phosphate rock by eliminating our wasteful practices. This will require a combination of low-tech and high-tech solutions, including efforts to prevent soil erosion, development of more-targeted methods of fertilizer application, and the creation of new, phosphorus-efficient crops, which produce a larger yield per phosphorus unit applied. Fortunately, unlike fossil fuels, phosphorus can be used over and over -- this is what occurs in natural ecosystems, where it is recycled innumerable times from its first mobilization from the Earth's crust to its eventual deposition into lake and ocean sediments.

(And right, I forgot that higher prices will incentivize, among other things, higher efficiency in use.)

Weather as an instrument, etc.

Michael Roberts explains in a nutshell the econometrics of his fascinating and widely-referenced paper on temperature's worrying effect on corn yields. If you’ve ever wondered why more agricultural economists don’t use weather as an instrument or worry about the fundamental endogeneity of futures prices, this post is for you.

The Christian case for fighting hunger

Roger Thurow, co-author of Enough, makes the Christian case for fighting hunger through agricultural development.

There's the political side of hunger and a policy prism. But there is this moral imperative to solving hunger. It's the right thing to do. Churches are extremely important for pushing the moral importance of the issue of hunger. It is something appreciated and understood in churches, since one of the main precepts of all religions is to feed the hungry. And for Christians, Matthew 25:35, there it is: "I was hungry and you gave me food … What you did to the least of these my brethren, you did unto me" (v. 40).

Bono referred to that passage when he was at Wheaton College on his Heart of America tour. Francis Pelekamoyo, the head of Opportunity International in Malawi, searched the Bible and wondered: What should I do after my years as central bank governor? That's the passage he kept coming back to. This is what we should do. This is what Jesus wants us to do.