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.
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).
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)
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.
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.
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...That should sound pretty familiar to regular readers who have seen the same trick with food prices.
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.
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.
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.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.
“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.
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.
Is it climate change's fault? Hard to say, honestly, since pinning any single weather pattern on climate change is impossible, although as the Economist article cited above says, it fits the pattern of increased extreme events we would expect with global warming.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.
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.The study also draws the intuitive conclusion that larger financial participation probably lowered volatility, rather than raising it.
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.
Globally the demand elasticity for these crops combined is about 0.05 and the supply elasticity is about 0.10, perhaps a little larger. Both of these elasticities are far greater than they would be if estimated using traditional econometric methods that do not account for the joint-dependency of prices on supply and demand. If applied to US ethanol policy, they suggest US ethanol subsidies have caused about a 30% increase in prices for these key commodities and about a 35 million acre expansion of cropland worldwide. That's about the size of North Carolina, the state where I live.A 30% price increase from biofuels alone is quite substantial. If I recall correctly, IFPRI estimated that biofuels accounted for 30% of the total recent rise in food prices (note the distinction from the absolute 30% implied by Michael's work). Other estimates varied widely, going up to 75% of the total rise in an unreleased but leaked World Bank report that caused quite a bit of controversy.
The amount of fossil fuel in mega joules needed to make one mega joule of gasoline is 1.19 versus 0.77 for corn ethanol and 0.10 for cellulosic ethanol.(That 1.19 includes the mega joule of energy from combusting the gasoline, which is why the wording is misleading.)
How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.Yikes. Agricultural commodities are largely fungible, like oil, from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice.
The man who refuses to send his corn to market when it is at twenty pounds a load, because he thinks that in two months time it will be at thirty, if he be right in his judgment, and succeed in his speculation, is a positive and decided benefactor to the state; because he keeps his supply in that period when the state is much more in want of it; and if he and some others did not keep it back in that manner, instead of its being thirty in two months, it would be forty or fifty.I think Malthus is wrong that any price volatility caused by speculation is benign, but otherwise this is an admirable defense of the beneficial role that much-maligned (today and throughout history) speculation can play in food markets.
If he be wrong in his speculation, he loses perhaps very considerably himself, and the state suffers little; because, had he brought his corn to market at twenty pounds, the price would have fallen sooner, and the event showed that there was corn enough in the country to allow of it: but the slight evil the state suffers in this case it almost wholly compensated by the glut in the market, when the corn is brought out, which makes the price fall below what it would have been otherwise.
But, exactly what question are we picking sides on?I'll interpret from the wording of Question A that Parke is skeptical of GMOs. First, from a clarity of argument/logic perspective, it seems to me like a stretch that we could conclusively prove that GMOs are never worth pursuing within the next few years. Second, like Michael Specter, I tend to be more positive on at least giving GMOs strong consideration, simply because no one has convincingly demonstrated that future food demand of the entire world can be met relying solely on traditional (or "wholesome" organic) food production systems.
Question A is:Could there ever exist a GMO technology worth supporting?Questions B1, B2, B3, and B4 are:Are current oversight systems inadequate to protect against food safety failures and environmental harms? Do current GMO technologies promote increased chemical use? Have current GMO technologies been oversold prematurely? Does the current regime of intellectual property rights favor multinational corporations over farmers?I have no answer to Question A right now. I'll find out the correct answer in a few years.
Here's where I am more confident: If you oppose GMOs, it benefits you to remain friendly with everybody who shares your answers on Question B, regardless of their answer to Question A.
I think higher food prices--the kind the poor will see much more than anyone reading this blog post--are one of the biggest risks from global warming. If you don't care about whether the poor eat or not, I think you will care about the civil conflict that would accompany their hunger. If GMOs solve the problem, great. But I'm kinda skeptical that they will...... and...
For people in the United States these dramatic predictions are actually of little direct concern. Raw commodities make up such a tiny share of retail food prices we would hardly notice a 10-fold increase in corn prices. The price of a quarter-pound hamburger (produced from corn-fed beef) would probably go up by less than a dollar. It’s hard to believe we’d buy much less meat as a result. Indeed, demand growth today comes less from population growth and more from rising incomes and meat consumption in China. (Keep in mind that it takes five to 10 calories of staple grains to make one calorie of meat.)
But three billion people — nearly half the planet — live on $2.50 per day or less. The poor typically spend a third to half of their income on food, composed mainly of staple commodities. If food quantities go down and prices go up, it’s the world’s poor who consume less.
The numbers in the quote came from my own back-of-the-envelope calculations. There are about 6 lbs. of corn used to produce each lb. of beef. Corn sells for about $3.70/bushel. A bushel is 56 lbs. So I figured the value of corn in a pound of beef was about 40 cents, or 10 cents in a quarter pound hamburger. If corn when up to $37.00, a lot of people in poor countries would starve to death. But the price of a burger would go up just 90 cents.
Also, empirically, retail prices tend vary less than wholesale prices in absolute terms. In other words, I was being conservative--a pound of beef would probably go up a lot less than 90 cents.On the topic of commodity prices, Michael also cites a recent paper on whether futures prices are effective predictors of commodity prices; the conclusion seems to be they they outperform a random walk, but that isn't necessarily significant in the statistical sense.
So, in response to Grist and the position by the American Farm Bureau on climate change, one may wonder: Why would farmers oppose the climate bill if they have so much to lose from potential global warming?
There is a simple answer: a big hit to crop yields does not imply a big hit to farmers' profits. In fact, if the rest of the world is unable to make up for U.S. losses, a big hit to yields is probably a very good thing for farmers profits. At least for the corn-soybean guys in the Midwest.
You see, the demand curve for basic grains is very steep. We've estimated an elasticity of about 0.05 (also see this paper). So if yields worldwide get cut by 50%, and no additional supply comes online to replace that loss, prices will go up 1000%, and farmers revenues will go up 500%. Farmers' profits will go up by a lot more than 500%.
So, while climate change is looking bad for buyers of basic grains, like North Carolina hog farmers and the urban poor in developing nations, those who grow basic grains will do very well. The incentives are very clear: opposing climate change legislation is good for corn growers' pocketbooks.
