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.

Do sugar quotas have any redeeming qualities?

Subsidies get most of the press and credit for distortionary American agricultural policies, but egregiously protectionist sugar quotas may deserve more attention. Not just because lifting them could help Haiti, but because they seem so single-mindedly rent-seeking, with no socially redeeming characteristics I can think of.

Restrictions on imports have caused American users to pay much more than the rest of the world for sugar. That gap recently blew out to its widest in a decade.

Mr. Vilsack's comments raised the prospect of increased demand for global sugar and drove prices up 2.7%, or 0.44 cent, to 16.98 cents a pound on ICE Futures U.S. Prices for U.S. domestic sugar dropped 2.1%, to 30.8 cents a pound. That narrowed the gap between the two to 13.82 cents a pound.

A nearly 100% price premium to the world market is absurd, and I'm not sure how these could possibly be defensible in, say, the WTO.

Krugman on environmental economics

Long but excellent article by Paul Krugman on Environmental Economics 101 and the economics of climate change. I also recommend Michael Roberts' addendum and heartily second his emphasis on argiculture, forests and land use which Krugman under-addresses.

One thing I found interesting was Krugman's favorable take on both the legitimacy and the feasibility of carbon tariffs:

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important. In any case, however, you can argue that carbon tariffs are well within the rules of normal trade relations. As long as the tariff imposed on the carbon content of imports is comparable to the cost of domestic carbon licenses, the effect is to charge your own consumers a price that reflects the carbon emitted in what they buy, no matter where it is produced. That should be legal under international-trading rules. In fact, even the World Trade Organization, which is charged with policing trade policies, has published a study suggesting that carbon tariffs would pass muster. [emphasis mine]

These aren't pushover arguments, but my gut reaction is that even if the WTO sanctions this type of action, the reaction from countries like China wouldn't be pretty.

Haiti and agriculture

Michael Roberts points out that one, U.S. import quotas support a domestic price well above the world price (see below), and two, the Dominican Republic's U.S. sugar import quota is twenty times that of Haiti.

I remember first reading about the stark gap (economic, political, and environmental) between the Dominican Republic and Haiti in Jared Diamond's Collapse; there are obviously a host of causes that go far beyond U.S. policy. Here is a satellite photo of the Haiti-DR border; note the severe deforestation on the Haitian (left) side.

Tyler Cowen suggests that the Haitian quota be repealed in the light of Haiti's recent tragedy. I agree with Michael that the impact now is likely small - what would have really mattered would have been lifting the quota fifty years ago.

In other Haiti news, Roger Thurow laments that the agricultural component of Haiti's recovery aid is being largely ignored

The UN’s Food and Agriculture Organization says its part of the appeal - $23 million to help revive Haiti’s food production – is being largely ignored. Only 8% has been funded.

Hopefully the recent return to prominence of agriculture on the broader aid scene will facilitate this being remedied by the time the Haitian growing season starts in March,

American mercantilism, redux

I was sound asleep in Ethiopia for Obama's State of the Union address, and it wasn't pleasant to wake up to this debrief:

Then there was his disappointing discussion of trade, which included a bizarre promise to double U.S. exports in five years. Does this mean he expects the dollar to drop dramatically? He also announced the launching of "a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security" (more on that topic here), and vowed to "seek new markets aggressively, just as our competitors are." Nothing here, other than a cursory, noncommittal mention of the Doha round, indicates that Obama views trade as anything other than a zero-sum game. There's a name for this approach to trade: mercantilism.

Macroeconomics has never been my forte, and I was under impression that mercantilism was essentially a discredited 18th-century pre-economic theory. According to Wikipedia, though, it is not that simple, e.g.:

Paul Samuelson, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

I'll have to let others who are more educated in these matters sort this out, but my feeling is not good and my populism radar is blinking.

Obama can't seem to keep anyone happy - he managed to promote the one plank of the liberal/progressive agenda that Paul Krugman doesn't agree with.

"Food miles" are stupid

This is not news, but I hadn't really appreciated it until digging into the impressive success story of Kenyan horticulture recently. Feeling threatened by Kenya's initial success, UK's organic trade organization proposed stigmatizing - or even outright banning - products flown in from far-off countries on the basis of greenhouse gas emissions.

This ignores, unfortunately, the emissions from many other phases of food production, e.g. heating greenhouses to grow tomatoes in the winter in northern Europe. Here are a few choice quotes from a good Guardian article on "How the myth of food miles hurts the planet":

But the idea that 'only local is good' has come under attack. For a start, food grown in areas where there is high use of fertilisers and tractors is likely to be anything but carbon-friendly, it is pointed out. At the same time the argument against food miles - which show how far a product has been shipped and therefore how much carbon has been emitted in its transport - has been savaged by experts. 'The concept of food miles is unhelpful and stupid. It doesn't inform about anything except the distance travelled,' Dr Adrian Williams, of the National Resources Management Centre at Cranfield University, told The Observer last week.

'Half the people who boycott air-freighted beans think they are doing some good for the environment. Then they go on a budget airline holiday to Prague the next weekend,' adds Bill Vorley, head of sustainable markets for the International Institute for Environment and Development. 'They are just making gestures.'

Carbon tariff table-turning

Speaking of carbon tariffs:

One reason for skepticism is that I’m actually skeptical that a properly implemented set of worldwide carbon border adjustments would actually achieve its intended purpose of boosting American manufacturing... The EU, Canada, and Japan are in the aggregate much more significant trade partners than China/Mexico/Brazil. And the case for them charging us carbon tariffs seems about as good as the case for us charging the Chinese.

Yet another reason the “border tax” aspect of the Kerry-Graham compromise is a terrible idea.

From Matt Yglesias, via MR.

Protectionism in Kerry-Boxer

Like in Waxman-Markey, the new Kerry-Boxer bill features concerning provisions which hint at carbon tariffs.

The Boxer-Kerry bill devotes a single sentence to what has become an increasingly thorny question: Should the U.S. slap carbon tariffs on imports from countries that don’t curb their own greenhouse gases, as the House climate bill did? To wit:

"SEC. 765. INTERNATIONAL TRADE. ‘‘It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.’’

“Border measure” seems to mean “border adjustment,” which is how the House version of the bill labels tariffs on imports from environmentally-unfriendly countries. The House bill says those tariffs have to be “consistent with international agreements;” the Senate speaks of “international obligations.” Both appear to refer to the questionable legality of carbon tariffs under World Trade Organization rules.

This is triply concerning because the House has already passed a bill with similar provisions, and Obama hasn't exactly distinguished himself as the stalwart defender of free trade.

Do U.S. ag subsidies really increase production?

Agricultural subsidies in the developed world are the perennial bogeyman of world trade negotiations. Michael Pollan also blames them for America's nutritional crisis, because they make food too cheap.

In reviewing Pollan's recent NYT op ed, Michael Roberts links backs to several interesting posts on why he doesn't think ag subsidies (aside from ethanol mandates) increases U.S. agricultural production. This is a pretty interesting argument, as it runs counter to the obvious intuition on subsidies.

His main point is that agricultural production appears to be driven by conservation policy and payments, not subsidies. I don't quite understand how conservation acreage is determined from his post, so I don't yet entirely understand his argument.

The other interesting point is that not all subsidies are volume-driven (so these obviously wouldn't effect production).

What would be the implications for world trade if this weren't true? Well, it wouldn't make rich-world farmers any more willing to give up their subsidies. But it might change our beliefs about the trade gains to be realized if the subsidies are eliminated (the standard argument is that African farmers would receive higher prices for their products if it weren't for these subsidies). Unfortunately, that argument alone is unlikely to effect any major breakthroughs at the international negotiating table.

Ugly protectionism

Yikes - Obama has slapped tariffs on Chinese tires and China is already retaliating. Greg Mankiw is justifiably disappointed. I hope Obama isn't trying to drum up support for healthcare through protectionism. Healthcare reform is not worth the negative impact a trade war would have on living standards worldwide.

Update: Condemnation in the econoblogosphere is rapid and unanimous, cutting across ideological lines. E.g. Brad DeLong: "Barack Obama Does Something Really Stupid". The WSJ's Real Time Economics rounds up others, including this gem from Ferris Bueller's Day Off:

“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.”

Score one for free trade in agriculture

In a victory for anyone who believes that distortionary agricultural subsidies should be eliminated, the WTO has ruled against the U.S. over cotton subsidies.

A ruling against the U.S. in a long-running fight with Brazil over American payouts to cotton growers sets an important precedent for developing nations concerned by what they see as excessive U.S. support for farmers.

A World Trade Organization arbitration panel ruled Monday that Brazil is entitled to $295 million upfront, and nearly $150 million a year, for the U.S. failure to eliminate subsidies to the cotton industry.

If the U.S. does not comply, Brazil can retaliate with its own tariffs in completely different industries:

The ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property.

The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection.

Let's hope this is a step towards bringing down the existing edifice of American and European agricultural subsidies. Not only would the direct benefit be massive (one FAO study estimated that complete liberalization of agricultural trade would boost global incomes by $165 billion per year), but this would also clear the major obstacle to progress in world trade negotiations, success in which would carry even larger benefits to global welfare.

(with appropriate protections for poor countries, etc. - I am not a blind free trade fanatic, but even lefty economists acknowledge the enormous benefits that freer trade would bring)

Would a refined products embargo let Iran reduce fuel subsidies?

A few weeks ago I posted a few times on the proposed embargo on refined product imports on Iran (here, here, here) with the help of a knowledgeable friend; that friend now passes on an interesting rebuttal from NIAC on "Why petroleum sanctions only make things worse." The highlight:

A gasoline embargo actually benefits the government of Iran.

- A gasoline embargo would enable the government to eliminate burdensome subsidies and place all the blame on the United States.
- Iran has to import roughly 40 percent of its domestic gasoline consumption at market prices and then resell it at a subsidized price of about 40 cents per gallon.
- These subsidies cost the government of Iran between 10 and 20 percent of GDP, annually.[i] The Iranian government has tried several times to eliminate the subsidies, but has been stymied by popular opposition. An embargo would provide the excuse they need, and free up the government to spend the money elsewhere.

Eliminating subsidies with perfect timing would be a tricky thing to pull off - the removal of 40% of supply alone will send prices skyrocketing, which removing subsidies would only make worse. Furthermore, if sanctions were removed, the government would be hard-pressed to not reinstate the subsidies. But the opportunity is undeniably there. Yet another reason why this particular lever on Iran is probably not the best.

Cap-and-trade, U.S. refiners and carbon leakage

Good post and comments discussion over at Energy Outlook on the effect of cap-and-trade on U.S. oil refiners, of which I'll attempt a brief synopsis:


- Geoff judges as reasonable the scenario described by the new API-funded study on Waxman-Markey, which says that U.S. refiners will suffer under the Waxman-Markey bill because they will bear more costs than foreign refineries, becoming less competitive and losing volumes to imports.

- Commenter bartman points out that this loophole could be closed by requiring import terminals to also buy permits, and that the real danger to refineries is falling domestic consumption due to higher CAFE standards, higher gas prices and electric vehicles.

- Geoff responds that yes, but importers probably wouldn't be required to have permits for upstream and refining emissions, just combustion emissions, and that the 2% permit allocation in W-M will not cover all of U.S. refiners' direct emissions.

- bartman agrees that refiners in non-carbon-pricing jurisdictions would have a slight advantage, but most U.S. refined product imports come from Canada or Europe, which have or will soon have carbon pricing. (he also opines that climate legislation won't pass this year)

- PelinoC then adds that Canada energy firms will be worse-off (e.g. oil sands have more upstream emissions) and predicts that carbon tariffs will quickly be imposed.


I don't mind that Waxman-Markey is a back-handed gasoline tax, because I think a higher U.S. gas tax is probably a good thing and there's no way one would pass through the front door. The more I think about it, though, the more I fret about the unappealing choice between protectionism on one hand and carbon leakage on the other. A global trade war would be disastrous, but examples like this in refining show increasingly plainly that most of the benefits of cap-and-trade (not to mention many industrial jobs) could leak away if the system has holes and other countries don't follow. There's been encouraging news from China and India lately, but we are still a long way from anything that looks like a globally consistent and enforceable price on GHG emissions.

Traces of GMO halt US-EU soy trade

It doesn't take export bans to throw a wrench in the smooth workings of the world food market:

European trade sources said US soya shipments to Spain and Germany were found to have traces of GMO maize varieties which are prohibited in the EU.

Mattias Sundholm told the Reuters news agency: "The shipments have been rejected at the EU borders, and have been consigned and recalled when already on the market within the EU, unless they have already been consumed."

The US Grain and Feed Trade Association estimates that 200,000 tonnes of US soya had been denied entry to the EU, by mid-July. Given the uncertainty, international traders have ceased all further shipments.

This has raised concerns about supplies of key feed ingredients for European livestock.

A simple mistake (or was it?) has the potential to disrupt the flow in a way that has systemic consequences, which is worth bearing in mind when thinking about the future of where food will be produced vs. consumed. It's easy to dismiss food self-sufficiency schemes in a globalized world, but the past two years have shown us how rapidly trade can break down, and that caution is warranted.

Informed thoughts on Iran refined products embargo

On the topic of a refined products embargo on Iran, an anonymous and knowledgeable source writes:

A petroleum product embargo on Iran would be devilishly difficult to achieve -- too many porous land borders, especially with Turkmenistan, Afghanistan and Pakistan -- and very liable to escalate to full-scale conflict. That said, I support the effort by Congress to add that particular card to the President's hand because Iran's petroleum product imports is one area in which the United States has considerable leverage. The very threat of such action could effect change in Tehran's strategic calculus.

The idea makes sense from an economic perspective in that Iran spends quite a bit to subsidize petrol consumption (these price controls are the reason the Iranian refining sector endures chronic underinvestment). A petroleum product embargo would raise the price of petroleum products such that the Iranian treasury would be drained of funds at a greater rate. Tehran could enact stricter rationing of petrol, as is already the case, but this could provoke substantial domestic unrest (as it has in the past). Alternatively, Tehran could slacken its petrol subsidies, causing higher prices at the pump for Iranian motorists, but this is also unlikely to make people happy.

I pushed this person on the feasibility of smuggling:

Granted the land borders you mentioned are porous, but Turkmenistan and Afghanistan are themselves effectively landlocked, and I can't imagine they're long refined products... and if I remember correctly Pakistan is also a net importer of gasoline and diesel. So it seems that, until the new port at Gwadar is online (not sure when that is), the most likely sanction-breaking smuggling path is via Karachi and across Baluchistan, which doesn't strike me as a particularly easy route (particularly with recent unrest in Baluchistan)... and if we are talking about anywhere near 40% of Iran's refined products (which is what I heard they import), that is a huge volume to push through a long, unstable and illicit supply line.

... and they pushed right back:

Your thinking is on the mark. But I wouldn't underestimate human ingenuity. Iraq also subsidizes petroleum products, which has been the source of a great deal of smuggling -- purchase petrol or diesel in Iraq at a low price, re-sell in Turkey, Syria or elsewhere for a large profit. If Iran were under some kind of onerous petroleum product sanctions, there are probably large networks of Shia in Iraq sympathetic to Iran which would smuggle petroleum products across the border for an even larger profit.

As for the Baluchis, they need money to fund their insurgency as well. Getting in on the smuggling business could be very lucrative for them. To a certain extent, I am making the assumption that large shortages of petroleum products in Iran plus long porous borders plus a ton of opportunistic (and economically self-interested) actors in the region will lead to large-scale smuggling. The refined petroleum products will be able to find their way.

So not only difficult to implement, but the military threat to the Strait of Hormuz is substantial:

Think small motorized skiffs, something like the Somali pirates in the Gulf of Aden, with rocket launchers or rocket-propelled grenades swarming more cumbersome US naval vessels and/or oil tankers. (There was a war game to this effect and the virtual Iranian forces handed a serious defeat to the US Navy.)

Finally, one more subtle option would be to put pressure on the banks that finance petroleum product importers - apparently "this is what the US has been doing with regards to North Korea for years."

Carbon tariffs reach the Senate

After the House set a poor example, I was hoping the Senate would take a more mature view on carbon tariffs and steer clear of protectionism, despite the temptation. Sadly not:

Today, ten Democratic senators sent President Obama a letter demanding a “level playing field” for U.S. manufacturing in any climate plan. In plain English: If you want your climate bill, you better include “carbon tariffs” to make sure U.S. jobs don’t scurry off to unregulated China.

The list of senators includes some heavyweights, but all are swing votes for the bill—Debbie Stabenow and Carl Levin of Michigan; Robert Byrd of West Virginia; Arlen Specter of Pennsylvania; Evan Bayh of Indiana; and Al Franken of Minnesota. Without the support of these lawmakers, you can stick a fork in the climate bill—it’s done.

... The ten senators take the opposite approach: “By eliminating the competitive benefit of not acting to address this global problem, it should spur countries to reach a comprehensive accord.”

One hopes this can be negotiated around - signed climate legislation enshrining carbon protectionism into law would be a scary thing.

Iran imports refined petroleum products

In the NYTimes today:

The Obama administration is talking with allies and Congress about the possibility of imposing an extreme economic sanction against Iran if it fails to respond to President Obama’s offer to negotiate on its nuclear program: cutting off the country’s imports of gasoline and other refined oil products.

The option of acting against companies around the world that supply Iran with 40 percent of its gasoline has been broached with European allies and Israel, officials from those countries said. Legislation that would give Mr. Obama that authority already has 71 sponsors in the Senate and similar legislation is expected to sail through the House.

The fact that Iran imports refined products like diesel and gasoline may come as a surprise to the general public, which sees Iran as an "oil producer" (in the Persian Gulf region which of course supplies "all of our oil") under "economic sanctions." Turns out refined products are exempt from the sanctions - at least until now.

However, given Iran's likely retaliation - they've threatened "cutting off oil exports and closing shipping traffic through the Strait of Hormuz, at a moment that the world economy is highly vulnerable" - these extreme sanctions seem too risky for the U.S. to actually push, which reduces their credibility as a threat and negotiating tool.

Update: FP Passport ponders whether the threat of nuclear Iran might convince China to join.

... Beijing surely sees the unacceptable danger in risking its existing Saudi oil supply for an as-yet nonexistent Iranian oil supply.

Right, but in light of the Strait of Hormuz chokehold, would Beijing be willing to risk short-term Saudi oil supply to "assure" long-term Saudi oil supply through sanctions which may or may not dissuade Iran from becoming a nuclear power?

Capital controls are coming

... says Simon Johnson, who lays out his case and prediction for capital controls at the Baseline Scenario. I don't have a strong personal view either way but I think recent events make the Chicago/Larry Summers view that capital controls are categorically bad increasingly untenable.

Dani Rodrik is another longtime supporter of considerable academic heft.

Carbon leakage is bad, a trade war would be worse

Environmental Economics articulates the best argument I've heard for carbon tariffs:

The economics here are simple: If the U.S. prices carbon domestically (through Cap and Trade), then imports have to be priced accordingly, or the world price for similar products will be lower than the domestic price. The result will be more domestic purchases of foreign produced carbon intensive products and potentially leakage of U.S. industry to non-carbon pricing nations who potentially produce similar products with lower carbon efficiency than domestic manufacturers currently use. This has been the U.S.'s stance in international carbon negotiations all along and the primary reason the U.S. never signed onto Kyoto. Now, domestic carbon policy without border price adjustments puts domestic producers at a competitive disadvantage and will likely result in more imports of carbon intesive products and potentially higher carbon emissions globally.

All true... but it doesn't change that a global trade war would be disastrous. I continue to believe our best hope is the quaint idea that American "leadership" can inspire other countries to follow with their own climate change policies. The stick of carbon tariffs is too dangerous.

Consumers should share responsibility for emissions

Via Environmental Capital, Commerce Secretary Gary Locke "said something amazing" in China yesterday:

“It’s important that those who consume the products being made all around the world to the benefit of America — and it’s our own consumption activity that’s causing the emission of greenhouse gases, then quite frankly Americans need to pay for that,” Commerce Secretary Gary Locke told the American Chamber of Commerce in Shanghai.

The idea has some philosophical legs, as Lord Nicholas Stern and George Monbiot have discussed. That may not be enough to win over American consumers, particularly those who realize the ubiquity of affordable Chinese products in their lives. And it's not yet clear how this would be implemented, or how it would interact with the dangerous carbon tariffs embedded in the recently passed Waxman-Markey bill, on which, according to Locke, "the president has not taken a position."