Guest Post by Willis Eschenbach
People have short memories. One of the things that I have learned in this game is to start any particular quest by finding the longest continuous records and look at them to understand the situation. This prevents the unjustified exaggerations that result from a short-term view of an issue.
Take the world food supply. People worry that the food supply is being negatively affected by climate change. Or if not, that it will soon be negatively affected, by gosh, and this time they’re not kidding. Really.
The recent radical rise in food prices from 2005 to 2008 is often cited as if it were climate related. People claim that the prices of basic foods doubled in that time period and that climate played a part. To to take a different, long-term look at that, consider the ancient relationship between cost, supply, and demand. Here’s how it works, and it’s bozo simple, first rule of economics:
Scarcity drives up prices.
This basic relationship means that if we want to see if food in the world is getting more scarce or less scarce, we can look at the change in the commodity price over time. Here’s that chart, showing the yearly changes in corn and wheat prices since the mid 19th Century.
Figure 1 from Sumner, “Recent Commodity Price Movement in Historical Perspective”. After the 2008 peak prices subsequently dropped. Recently they have begun rising again, although they are below the 2008 levels. SOURCE: American Journal of Agricultural Economics
Some things are immediately apparent from this graph.
First, the claims are true, the price for the basic foodstuffs corn and wheat did double from 2005 to 2008.
Second, that doubling only returned the price to the 1995 level.
Third, the historical price levels (with excursions for two wars and the great depression) were pretty stable until after WWII. Since then (with the excursion for the 1971 oil shock), things have greatly improved.
Fourth, I see no trace of a climate-related signal in that graph. Might be one, but if so, it’s well hidden.
Fifth, during the period 1866 – 2006 there have been a number of shifts in climate, both PDO related and otherwise. There has also been a general warming. As far as I can tell, there is no sign of either of those in the corn and wheat price record.
SUMMARY
The recent increase of commodity prices is a real issue. And of course it hits the poorest hardest, so it should not be ignored.
However, a look at the historical record shows that we’re doing pretty well, thank you very much.
So while of course we should be concerned by any price increase that strike at the poor, the claims of impending food-related climate doom have no more historical or evidentiary foundation than any of the other, more familiar alarmist claims. Farmers have dealt with the vagaries of weather for centuries. When the climate changes they do what they have always done. They change their farming practices to adapt. The idea that a change of a few degrees will shrink the world’s farm production reflects the naive thinking of someone who has never been a farmer. If a couple degrees of warming over the next century were the farmers’ biggest problem, they’d be overjoyed …
w.
All the assertions that corn for ethanol is pushing up food costs simply does not fit the facts. Corn today is 1/2 the price it was in the late 1970’s when we had not meaningful fuel ethanol program and before mandates for ethanol added to gasoline existed. That price spike for corn to 2x todays inflation adjusted price was due to energy costs.
Oil prices are a major factor in the cost of food, and food prices closely follow world wide fuel prices.
If the corn for ethanol assertion was true corn prices today would be much higher than they were in the late 1970’s on an inflation adjusted basis. We are just so used to artifically low corn prices, that we think getting actual cost of production to grow the stuff is a rip off. It is not.
http://www.inflationdata.com/inflation/images/charts/Corn/corn_inflation_chart.htm
Corn production is not stagnant, but has been increasing steadily for 60+ years.Corn yields per acre have increased 4x since 1940, today corn yields are between 150 and 160 bushels per acre, in 1980 they were about 120 bushels/acre and in 1940 yields were near 40 bushels per acre.
There is no corn shortage due to fuel ethanol. U.S. Corn Output Per Pound of Fertilizer rose 55% in The Past 35 Years (circa 2007)
http://www.agry.purdue.edu/ext/corn/news/timeless/YieldTrends.html
In the 1970’s we exported 13 million metric tons, by 1979/80 we exported 62 million metric tons.
By 1985 exports dropped to 31 million metric tons due to low demand growth in production in other countries and U.S. Government price supports that held prices up. In the second half of the 1980’s exports went back up to the 60 million metric ton range. In 2007/2008 we exported 61 million metric tons of corn AND fed the booming fuel ethanol industry at home.
2009 corn yields were at a record 165.2 bushels per acre, and our corn exports are only 15% of the U.S. corn production. We produced something like 13.3 billion bushels from 88.8 million planted acres of corn in 2010.
Larry
The weather would affect yield. Production efficiency and market forces (futures, hording, government give-aways to starving third world nations, emerging markets not driven by economics [bio-fuel]) would affect price. Find a profit/yield plot – that may show more.
At the tail end of the graph you can see the inflection point where millenarian Gaia worshiping craziness kicked in right when the temperatures went down and storminess increased in the preferred mid latitude growing locations. Would be interesting to see the more recent data points.
hotrod (Larry L) says:
“All the assertions that corn for ethanol is pushing up food costs simply does not fit the facts. Corn today is 1/2 the price it was in the late 1970′s when we had no meaningful fuel ethanol program and before mandates for ethanol added to gasoline existed.”
I agree that higher energy prices are partly to blame. But ethanol diverts production, and demand being the same, food prices will be higher. In other words, if there was no ethanol production, prices would be lower.
Part of the rise is in response to inflation, which is kept artificially low in the official numbers. In fact, inflation is approaching 10% and commodities are responding. I was a real estate broker in the 1970’s when inflation was this bad, and I remember when VA mortgages were 17.5% and FHA loans were 18.5%. Commodities were rising fast then, too. [The upside was that it helped boot the incompetent Jimmy Carter out of office.]
The real worry is much higher interest rates, which will prick the overspending bubble and cause more economic and social carnage than we have seen so far.
“All the assertions that corn for ethanol is pushing up food costs simply does not fit the facts. Corn today is 1/2 the price it was in the late 1970′s when we had no meaningful fuel ethanol program and before mandates for ethanol added to gasoline existed.”
I don’t know what you;re talking about. I know not very long ago corn was 10 ears for $1. Then we started making ethanol. Next thing I know corn is 2 ears for $1. If those 2 things are not related, it is an unbelievable coincidence, and pure coincidences are really quite rare…
em smith; my memory is clouded but I seem to remember that the price of certain goods, foodstuffs notably, are very elastic at the margin. As such a speculative witholding of a fraction of supply will have a more than compensatory increase of price on the remainder; aka price hikes and starvation. As such the speculators do not “find the price” they can control it very simply.
Willis Eschenbach says:
June 10, 2011 at 11:21 am
David says:
June 10, 2011 at 5:18 am
I re-did the graph to have it up to date, and corn prices adusted for inflation are back to 1984 levels (not 1995). Prices since 2005 tripled (3.3X), not doubled. The last two peaks (2008 and 2011) reflect the increase from competition from energy use. Reasons for this are most probably related to climate change policy rather than climate change. If you need any graphs on commodities (or financial or economic), just let me know, it only takes me a second to do.
Thanks, David. Did you do the calculations in constant dollars?
=============
It would be very interesting to see David’s corrected graph given 5 cent bread in the day, any chance it can be posted with the article?
Eyal Porat says:
June 10, 2011 at 6:49 am
“Willis, any connection to the recent Malthusian-like post by Tom Friedman on the NYT a few days ago?
(http://www.nytimes.com/2011/06/08/opinion/08friedman.html)
Amazing how this theme never dies.”
It’s the way Friedman earns his money. What is amazing is that anyone would still buy the NYT.
Some here seem to think that small changes in temperature averages make little difference to agricultural productivity given the large diurnal range in temperatures. The following figures show movements in the Köppen climate boundary in the US during the 20thC.
http://www.sturmsoft.com/climate/suckling_mitchell_2000_fig2_3.gif
Small changes in average seasonal temperatures translate to non-trivial changes in growing season length. Hans Erren provided the figures to me when I asked why, if the temperatures over the continental US were rising, that the USDA had revised its planting charts to reflect the opposite case?
It’s worth noting that in the coolest decade, the 1970s, that the People’s Paradise (USSR) had to import wheat from the US to avoid mass starvation.
@paul brackley. M memory is also clouded, but I seem to remember that this sort of speculation was one of the reasons for Victorian Robert Peel ramming through the Corn (wheat) Laws in the UK, thereby earning the eternal enmity of the landed class.
Agricultural production levels are influenced by many factors; fuel prices, seed cost, livestock costs, land costs, regulations, labour costs, technological innovation, fashion, disease, social changes, and the weather. Agricultural output is only one of a number factors which in turn influence agricultural commodity prices, which in turn, amongst other things, influence the price of food.
I would suggest that the recent rises in world commodity prices has absolutely nothing to do with climate ( or probably even bio ethanol) and everything to do with economics, otherwise you have to come up with a convincing argument as to how climate change has caused a doubling in the gold price!
I am old enough to remember when the government had huge wharehouses full of food. Our population was less then half what it is today and our food storage was 100 times greater. While I agree that food prices are NOT that bad yet I want to point out that we are more susceptable then ever to any problems in the food supply chain. When something does happen to interrupt food supplies the prices and availability we will be in trouble. Look at the chart you used in the story. You see a couple of major spikes? THAT is what will hurt us.
“One German organic farm has killed twice as many people as the Fukushima nuclear disaster and the Gulf Oil spill combined.”
Instapundit » Blog Archive » QUOTE OF THE DAY: “One German organic farm has killed twice as many people as the Fukushima nuclear…
I say, ban organic foods. We can’t know if they’re safe!
If we keep feeding the planet via organic food prices will go lower as less demand will ensue.
Once again I find myself recommending “Scarcity and Growth” by Barnett and Morse (the original version – there were a couple more involved sequel editions by other authors). They performed a similar analysis for several commodities, which thoroughly debunked the alarmist models of the Club of Rome in “Limits to Growth.” Ironically the wheel has come around again and we find ourselves battling those who would peddle alarmist models in order to push their policy agenda upon society.
Concluding Remarks [ American Journal of Agricultural Economics — from the graph caption above]
“The percentage price increases for grains from 2006 through 2008 were among the largest in the 140-year history for which U.S. data are readily available (figure 2). That said, at the end of 2008, real prices of grain remained near those of just two decades earlier (figure 3). Government policymakers often fail to appreciate the strength of forces driving commodity prices, and policies often exacerbate market imbalances or use commodity market flux as a rationalization for income transfers to favored groups. Looking forward, relatively minor demand-side adjustments to biofuels policy may allow grain prices to moderate significantly….”
Government policy should not be allowed to interfere with free markets <– I like that part. Would someone please tattoo it on the EPA's forehead.
GoneWithTheWind says:
June 10, 2011 at 1:27 pm (Edit)
I am old enough to remember when the government had huge wharehouses full of food. Our population was less then half what it is today and our food storage was 100 times greater. While I agree that food prices are NOT that bad yet I want to point out that we are more susceptable then ever to any problems in the food supply chain. When something does happen to interrupt food supplies the prices and availability we will be in trouble. Look at the chart you used in the story. You see a couple of major spikes? THAT is what will hurt us.
We live in a topsy turvy world where the supply of food is kept to a minimum in order to maximise profit for speculators. These people are looking for a killing, of millions…
Complacency is a killer. We need to take control before the inevitable happens.
Yikes, last comment should read:
Government policy should NOT be allowed to interfere with free markets <– I like that part. Would someone please tattoo it on the EPA's forehead.
[Fixed. ~dbs]
As an economist I would like to toss my 2 cents into the QEI and QEII camp. Perhaps it is not obvious from within the USA as yet, but the quantitative easings (QEI and QEII) have debased your currency. The Australian dollar (heavily influenced by commodities exports) is at all time highs since it was floated in 1983. Because much of your imports come from China and they are pegged against the US$ (although slowly increasing the renimbi) the inflation impacts are not flowing through strongly yet. Another factor is the weak consumer demand over there at the moment.
QEII ends this month and the Fed has said no immediate QEIII … economists are split on what that means for the US currency. There is no obvious pent up demand for US bonds in a market that was dominated by the Fed. Personally I think the second recession is about to hit, probably triggered by European debts woes, and it’s anyone’s guess what happens after that. Traditionally people run back t o the US$ in time of crisis, and I suspect some of that will happen, but one has to wonder how long before Asia becomes the dominant economic force in the world. The latter is a question of when, not if… the economic centre of gravity is slowly shifting from the west.
as a lad i lived in northeastern montana. (really really big wheat country.) the farmers would grow and harvest their wheat and sell as much of it as they needed to to at least “service” the bank loans. the rest they would put in storage. (those round tin buildings that you see all over the place in the area.) every morning that whole end of the state comes to a stop about 9:00 in the morning when the radio stations broadcast the prices. when the price gets high enough then the people sell the wheat and use that money for daughters college money, new combinders, a davenport for the front room (parlor)……….
one of the folk above was worrying about a rust problem with the wheat. wheat gets rust problems, fungus problems, you name it it gets it. HOWEVER the united states government in the form of the department of agriculture has been developing rust resistant (for the particular strain that is giving the current problem) strains of wheat on “laboratory farms” since before 1900. (my great grandfather got fired off of one in 1906 for plowing an inelegent furrow at the edge of a test plot.) this is one of the reasons that russian peasants have been eating bread made with american wheat since the great depression.
anyone that claims to have “natural wheat” is not exactly truthful as the current wheats have been developed and redeveloped so many times over the last century + that none of the original wild wheat exists in commercial quantities. if any of it was planted the various rusts that the modern wheat is resistant to would gobble it up in short order.
C
pompous git:
if you are looking for figures for wheat exports you may not find true indicators in the agriculture figures.
look up dot railroad figures on the millions of tons of grain moved to west coast, mississippi and great lakes ports for export.
BNSF is the major railroad in this endeavor and their basic quantity is 26 cars of 110 short tons per car. they make a major attempt to run them in 104 car trains of which they have several hundred.
the reason that people don’t know about this trade or the size of it is that it is right in the middle of fly over country.
in this area during harvest time you get passed on the highway doing 80 by herds of large trucks hauling grain from the field to the elevator on the railway.
C
hotrod:
please comment on the crop rotation that when it happens will invietabley take at least some of the corn acreage out of production.
then bounce the ~8 year “bumpercrop” cycle off of that.
just asking.
C
Actually it’s shortages which drive up prices. Any economist can tell you that scarcity is a totally different concept. Indeed, my pupils a few years ago sat an exam in which one of the questions required them to explain the difference.
Bulldust says:
June 10, 2011 at 2:01 pm
As an economist I would like to toss my 2 cents into the QEI and QEII camp.
=======
Hi Bulldust,
I’ve been following the Fed statements closely as well as many of the QE related objectives. QE1 had its purpose but QE2 (IMO) is a complete failure.
QE3 is currently off the table though the “Street” mistakenly believes Pres. Ob will find a way to stealth it in under the table to support his 2012 hopes. The probability of a QE3 success is zero if openly discussed.
I disagree about a 2nd recession and suspect we’ll see a flight to USD quality which will significantly impact market pricing and turn the precious metals and emerging markets trades into a tail spin.
I’d be very interested in your opinion of the following article related to the actual economics.
The Balance Sheet Recession Continues
http://caps.fool.com/Blogs/the-balance-sheet-recession/602214
Regards,
John from CA
If we were facing a food shortage, I don’t think we’d be facing an obesity epidemic…..nice analysis, Willis!
After all, where else are you going to see – or induce – double digit ‘gains’ (the stock market, for any gains/upward movement previously evidenced in the DOW are actually done so with very thin stock trading volumes) using the results of seeding the investment banks with the products of QE1 and QE2 (Quantitative Easing) …
Hence, the movement in commodities …
.