Guar: Shovels in a gold rush?

The analogy of selling shovels in a gold rush immediately came to mind when I read this:

U.S. companies drilling for oil and gas in shale formations have developed a voracious appetite for the powder-like gum made from the seeds of guar, or cluster bean, and the boom in their business has created a bonanza for thousands of small-scale farmers in India who produce 80 percent of the world's beans.

"Guar has changed my life," said Shivlal, a guar farmer who made 300,000 rupees - five times more than his average seasonal income - from selling the beans he planted on five acres (two hectares) of sandy soil in Rajasthan. "Now, I have a concrete house and a colour TV. Next season I will even try to grow guar on the roof."

In Jodhpur, under the shadow of an ancient fort, traders buy guar seed at 305 rupees a kg, a 10-fold increase from a year ago.

How big a deal is guar? Up to 30% of fracking cost and enough to send Halliburton shares down 5%, apparently.

With gas barely above $2/MMBtu, iconic producer Chesapeake shedding attractive assets to plug a cash gap, and even the oilfield services companies who do the drilling vulnerable, it seems the winners here are the farmers. But two cautionary notes. First, supply response can be rapid in agriculture - a single season - and such lucrative price fly-ups are seldom long-lived. And second, since guar grows in the desert and is susceptible to drought, I would not be surprised to find (once the dust settles) that guar is a water-hog like jatropha and hardly (like most other cash crops) a panacea for sustainable development.

Food prices and riots keep company

Via Michael Roberts, food prices cause are highly correlated with riots.

Cool-looking chart and good hypothesis to pursue further, although I am always suspicious of people who say things that sound suspiciously like dumb linear extrapolations.

Today, the food price index remains above the threshold but the long term trend is still below. But it is rising. Lagi and co say that if the trend continues, the index is likely to cross the threshold in August 2013.

On droughts

1. The drought has missed the corn belt, but the heat waves haven't (making Michael Roberts bullish on food prices).

2. You know a drought is bad when the camels are dying.

Ahmed Mohammad, a Somali camel herdsman, told BBC: "It is a terrible sign when camels start dying because when they start to die, then what chance have sheep, goats and cattle?"

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.

Volatility cuts both ways

Lest we be lulled into the assumption that commodity prices are on a one-way trip to infinity:

In just the last couple weeks corn prices have fallen from nearly $8/bushel to about $6.15. All of that is due to a rather small amount of information about the progress of this year's crop. Yes, there were reports of flooding and late plantings, but that kind of thing rarely has much effect on the overall crop production. The late plantings just set up even more volatility going forward, since the plants will be susceptible to extreme heat in July and August.

That's Michael Roberts, who concludes that

this volatility does provide a teachable moment: it shows how sensitive prices are to small quantity changes.

True, but I think we are collectively more attuned to the downside factors (climate change, growing demand) than the potential upsides (e.g., a sudden removal of biofuels mandates, or a restoration over several years of typical buffer stock levels). A 25% fall in a matter of weeks is huge, and a reminder that high food prices and food price volatility are not the same thing (a huge pet peeve of mine).

This can also be true for seemingly exhaustible physical resources, as yesterday's announced discovery of "vast deposits of rare earth metals" on small plots of Pacific Ocean seabed show us.

estimated rare earths contained in the deposits amounted to 80 to 100 billion metric tons, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

(don't sleep on the B vs. M - that is 800-1,000x current confirmed reserves)

I am pondering a longer post on what this means for commodities as an asset class (namely that over decades, they will not provide attractive real returns, although they may have some value as a hedge against inflation).

Third largest ag exporter is... the Netherlands?

Take the case of the Netherlands. Unbeknown to most people, it is world’s third largest agricultural exporter, despite having little land (it has the world’s fifth highest population density). This has been possible because the Dutch have “industrialised” agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world’s most advanced chemical and electronics industries.

Via Chang via Yglesias via MR. Note that the data is from 2003-2004 (I was suspicious because Brazil didn't breach the top ten). But nevertheless an impressive feat. Although it's worth mentioning that a large $ trade surplus in agriculture is not the same thing as being self-sufficient - the Netherlands is as exposed to rising staple crop prices as any other country (albeit with a high level of income, so consumers don't feel the hurt nearly as much).

Great news for cows

Rinderpest, a cattle disease that for centuries felled herds in Europe, Africa and Asia and caused periodic human famine, has been eradicated, veterinary epidemiologists announced this week.

Eradication is the Holy Grail of disease prevention and has been successful only once before. Smallpox, an equally devastating human scourge, was eradicated in 1980, proving it is possible to stamp out a microbe across the entire planet.

I always wonder how they prove eradication beyond a reasonable doubt. But nevertheless, a huge triumph. I spent some time last year with some folks who were instrumental in beginning this campaign back in the late 1980s/early 1990s - here is to them and their hard work over two decades.

A few responses to Prince Charles

I just read the transcript of Prince Charles' speech on sustainable agriculture in DC last week. There are a lot of good ideas, and a few areas in which I think more can be said.

Ag subsidies: I believe there’s a strong consensus across many individual issues and disciplines that American and European agricultural subsidies are wasteful and counter-productive. The challenge is a political one – there are about 20 farm states, and it’s very difficult to get things done legislatively in other areas (health care, immigration, climate change, you pick) without the support of at least some of that bipartisan group of 40 farm senators. It’s not a rich-world-only issue, too – here’s a year-old WSJ article (subscription required) on how difficult it has been to repeal fertilizer subsidies in India despite 40 years of trying, and recent fertilizer subsidies in Malawi have become a darling case study of country-led agricultural development proponents, despite criticism by the World Bank and others.

Scale: I think Prince Charles is too blasé about dismissing the benefits of scale for cost and efficiency of agricultural production. Cost is important not as much to you and me, but definitely to the urban slum-dweller in Cairo or Mumbai who spends 2/3 of his or her income on food. And efficiency is important for the environment – less yield per hectare of land means more land under cultivation, and since there’s not much unused cropland around the world, this results in degradation and cultivation of ecologically sensitive areas like the Amazon, the Sahel, Indonesia’s peat swamps, etc. If we can replicate current yields at scale using organic methods, that would be great, but the burden of proof is still on those who claim this can be done.

Local production: Another attractive idea that I think is easier to apply to ourselves (living in not only the richest but also one of the most agriculturally productive countries), but runs into difficulty when generalized across the world. There is a lot of upside in smallholder productivity in Sub-Saharan Africa, but in other regions that import food today – I’m thinking of mainly the Middle East and China – it would be very difficult for them to produce more food domestically without exactly the kind of unsustainable drawing down of natural capital that Prince Charles rightly warns against. If we want the most holistic and least naturally destructive agricultural system at a global level, it has to include a significant component of trade between the most fertile parts of the world and the less fertile but more populated parts (unfortunately the two don’t match).
To close, a photo I took from an airplane of pivot-irrigated wheat in the middle of the Egyptian desert, with water drawn unsustainably from the underlying aquifer (we do this in the American West, too). We Americans are very fortunate for the fertility as well as the economic prosperity of our country, and not all countries have the agro-ecological potential to feed themselves in a sustainable way.

Feeding the world just got harder

Whoops, that would be 10 billion people, not 9. Africa is the big driver. I suspect this number could still move a lot. Economic growth will be a key determinant.

Most shipped bulk commodities

One other factoid I found interesting in Prime Movers of Globalization was the relative volumes of the most shipped bulk commodities (besides crude and petroleum products, which dwarf them).

• iron ore, ~800 million tons


• coal, ~800 million tons


• grain (I think including oilseeds as well), ~300 million tons


• bauxite and alumina, ~80 million tons


• phosphates, ~30 million tons
  

This might only be interesting for commodity nerds, but I thought the drop-off was impressive.

Book review: Starved for Science

Along with Prime Movers of Globalization, I bought and read Starved for Science: How Biotechnology Is Being Kept Out of Africa after Tyler Cowen recommended it (although a colleague also mentioned it earlier the same day – the two together were motive enough for me). The thesis is that the under-penetration of GMO crops in Africa is a travesty, ultimately caused by the post-colonial export of rich-country attitudes from Europe to Africa’s urban political elites, who are then reluctant to take the risk of allowing GMOs, despite the tremendous potential benefits.

Author Robert Paarlberg is aggressive, even polemical, but one can sense his deep passion and anger on the topic, and his ample supporting evidence is hard to argue with. A few of his strong points are that proving the absence of risk is impossible (and in practice a selectively enforced double standard in regulation); rich-country citizens do not object to pharmaceuticals produced through GMO pathways, perhaps because they provide tangible benefits to the majority of the population, whereas higher crop yields do not; and that the safety standards applied to GMOs in the African countries that don’t allow them (all but South Africa) wildly exceed the level of other food safety standards in those countries (something like 700,000 people are estimated to die from food poisoning in Africa every year, and millions are affected by hunger and malnutrition).

Worth a read to hear an uncompromising and well-informed exposition of the pro-GMO position; although I believe there are multiple, interdependent paths to improve smallholder farmer productivity, I found myself swayed by his arguments. I would be interested to hear a critical rebuttal from the other side, though.

The line between trading and manipulation

Ah, the publicity that comes from an IPO...

This is OK and unsurprising...

Glencore made a speculative bet on rising wheat and corn prices in the early stages of last summer’s Russian drought, the world’s largest commodity trader has revealed ahead of its initial public offering that will value the company at $60bn.

... but this is pretty sketchy:

As it bet on rising prices, senior traders at the Swiss-based company publicly urged Russia to impose a grain export ban... On August 3, Yury Ognev, head of Glencore’s Russian grain unit, encouraged Moscow to ban wheat exports, saying: “From our point of view the government has all the reasons to stop all exports.” His deputy made similar comments. At the time Glencore distanced itself from the comments, saying they represented Mr Ognev’s personal views. Russia imposed the ban on August 5, sending the price of the cereal more than 15 per cent higher in two days.

As longtime readers know, I generally believe and document that speculation in commodity markets does more good than ill, but this type of lobbying for trade-reducing, volatility and uncertainty-enhancing measures makes me very uncomfortable, and will never be popular.

What crop supply response looks like

Stealing the link and title wholesale from Michael Roberts:

When prices for corn and soybeans surged last fall, Bill Hammitt, a farmer in the fertile hill country of western Iowa, began to see the bulldozers come out, clearing steep hillsides of trees and pastureland to make way for more acres of the state’s staple crops. Now, as spring planting begins, with the chance of drenching rains, Mr. Hammitt worries that such steep ground is at high risk for soil erosion — a farmland scourge that feels as distant to most Americans as tales of the Dust Bowl and Woody Guthrie ballads.

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.)

Heat, yields and prices: PPT version

Michael Roberts just posted a great agriculture presentation on his blog - take 5 minutes to flip through it. Not only is it a good synthesis of some meaningful content, it's very easy to follow (and as a consultant, a.k.a. professional PowerPointeer, I have high standards for these things).

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.

Decoupling of oil price and renewables

Geoff Styles has a post titled "Will $100 oil help renewables?", in which he argues the counterintuitive answer that, "no, not that much." Worth reading in full, but since I like to practice synthesis:

Today, gas predominantly sets the marginal price of power generation, and gas prices have decoupled from oil due to abundant shale gas supply. Transport is minimally electrified, so renewable power cannot yet substitute oil in that sphere. And prices for commodity input often rise along with oil, increasing renewable costs (a.k.a. the "receding horizon").

The first, I totally agree with. The second is broadly speaking true, although paths like CNG, gas-to-liquids and coal-to-liquids become economically viable with high oil prices and could re-strengthen the link between transport and electric power (as could increasing EV penetration over the longer term). The third is directionally true, but not absolute (and not entirely causal). Many second-gen biofuels use waste inputs which are not otherwise traded, so higher oil prices are an unmitigated boon for them. The prices of silicon and corn are often correlated with crude, but probably more because of overall economic growth than because crude drives their price. It will be interesting to see if corn starts to price off of its value as ethanol, as it did back in 2008. Not good for food security, if it does.

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.

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.