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Claims about food prices
My story is about a world where...GDP growth yields fewer poor people who respond to higher wheat prices by purchasing less meat or wheat, i.e. we have less of a shock absorber. That generates a reduced elasticity of demand of wheat. So prices have to rise by more in order to clear a supply-demand imbalance than was required in the past when there were more poor people who would adjust.
Here is much more, interesting throughout.
Posted by Tyler Cowen on May 14, 2008 at 06:16 AM in Food and Drink | Permalink
Comments
Interesting, but......... I would
add that he misses one reason. The
supply response of stuff like oil,
wheat is low. What this means is
that marginal farm or oilwell sets
prices. When wheat capacity is 100
in the world and demand is is 85
then prices are in equilibrium till
demand reaches 100 after which supply
fails to keep pace which leads to
rapid increases in price. I believe
this is the only model which can
explain the runaway price movement.
The stuff Ajay Shah is true but in
a long-run kind of way. There is also
a bit of circular logic involved
in his story. His logic is that -
Demand goes up and so do prices but
demand is able to go up because
prices aren't that important to
consumers. His logic that demand
inelasticity has fallen is in effect
a statistical illusion engendered
by low prices and lag in demand
response.Remember that in the long
run all elasticities are unity.
Posted by: sa at May 14, 2008 9:01:59 AM
What on earth inspires commenters to manually insert line breaks after every five words?
Posted by: david at May 14, 2008 9:18:17 AM
Thank God for black Americans otherwise we would have ended up with the most war mongery candidate from each party. Evidently the American people are in a mood for war.
I hope that republicans and independents are less racist than Registered Democrats or we are in for a president McCain. AHHHHHHHH!
I fear a train wreck coming.
David on some computers the text overflows to the right (one of my computers at home does this) and so some people manually put in line breaks and with manual breaks the short the line the safer.
On the topic there is pretty good elasticity on the supply side so I do not see this as a great problem. In fact there are some ways that can increase yield per acre but are not used because they cost more that the yield in return. There are also ways to reduce shrinkage. Some are close to being economical and so should come into use with price rises. Also better access to information can help growers respond to prices faster. See Tyler’s story about produces in India a while back.
Also sounds like an opportunity to some creative person.
Posted by: Floccina at May 14, 2008 9:33:33 AM
Opps that first paragraph should not be there. Sorry.
Posted by: Floccina at May 14, 2008 9:34:53 AM
It's rubbish. It relies on the debunked Irish potato famine example. There ain't no Giffen goods.
Posted by: SJ at May 14, 2008 10:23:18 AM
This sounds like an rebuttal to the argument that it is only envy that makes poor people care about how much money the upper income group earn.
Posted by: joan at May 14, 2008 10:40:40 AM
We are seeing the same thing we saw in the 1970s-- a major population group becomes rich enough to eat meat regularly. This leads to greater grain demand. But grain prices are largely a function of stocks. Consequently the increased demand does not impact prices until stocks are drawn down. We are now in that stage of the supply-demand imbalances induced by long leads and lags and it will take time until the world can react to the higher prices with higher supply.
The big difference this time is that the imbalance is more structural and less short run fluctuations. In contrast to the Chinese now, the Soviets normally were able to produce enough grain to fill even higher demand when they started eating meat. But now the Chinese are unable to fill demand domestically and must resort to the world markets-- the marginal supply.
Moreover, in the 1970s Nixon-Connelly deliberately took advantage of the temporary increase in demand to cut back domestic grain output to raise prices as a way to pay for higher oil imports. It was a deliberate policy.
Posted by: spencer at May 14, 2008 11:13:20 AM
It keeps amazing me how, in gross violation of Occam's Razor, people keep reaching to such a wide variety of disparate, mostly independent, and even contradictory explanations for the recent across-the-board dramatic price rises in practically all commodities. We just had a big thread about oil, and now we have a big thread about food, as if the two were completely unrelated. Soon I'm sure we'll have another thread bemoaning how the geology of copper, gold, platinum, and all the other metals have suddenly turned sour, about how after seven thousand years of copper mining we've reached "peak copper" during the same decade we've reached "peak oil." A thousand largely independent things seem to be going bad all at once, if we are to believe these "fundamental" explanations.
We are seeing the same thing we saw in the 1970s-- a major population group becomes rich enough to eat meat regularly.
Not true, but we do see the same myths being propagated today as in the 1970s. There were just as many, if not more, people increasing their meat consumption in the 1980s and 1990s as in the 1970s or now.
Posted by: nick at May 14, 2008 2:47:54 PM
Nick, I'd say Spencer is correct. You ignored an important part of his post which is stocks. For example, stocks of certain agricultural items are at their lowest levels in 20 years. World corn stock were about 200 million metric tonnes in 1986, and have now declined to 99 million metric tonnes. Same story with wheat.
China Oil consumption (thousands barrels per day):
1990: 1,990
2006: 7,201
There are also inputs to commodities that are causing problems. There is lots of Copper in Chile, but an electricity shortage is hampering efforts to increase production for this key supplier. Bringing new electricity online does not happen overnight (part of their problem is a drought that has hurt hydro power there).
So the issues right now are declining stocks (inventories) + increasing demand + input issues.
Go here to see agricultural charts for stocks.
http://www.cbot.com/cbot/pub/page/0,3181,204,00.html
Another great site:
http://tonto.eia.doe.gov/country/
Posted by: mcwop at May 15, 2008 12:47:20 PM
stocks of certain agricultural items are at their lowest levels in 20 year
This is only the official reported stocks from the major traditional warehouses. There is very good reason to believe these numbers capture only a small and declining fraction of today's total stockpiles. It has been widely reported, and AFAIK is generally agreed, that a wide variety of people and organizations are "hoarding", i.e. stockpiling, whether in their pantries or in non-reporting warehouses. Big commodity consumers (e.g. airlines) hedge against inflation by buying futures, but the vast majority of commodity consumers, especially of food, hedge by non-reported stockpiling. Hedging with commodity derivatives has increased more than five-fold over the last three years, so it's reasonable to expect that unofficial stockpiling has similarly increased.
We even have had news reports of food stockpiling in some parts of the U.S. by recent immigrants keeping up their old habit of hedging against inflation. Warehouse stores have been temporarily running out of rice or restricting quantities sold to keep from running out. In these cases the measured central wholesale stockpiles are drawn down in order to add to the unmeasured consumer stockpiles (or more generally stockpiling further down the sales chain).
Your China figure is greatly misrepresentative, involving a very unreliable reporting system and comparing a recessionary trough with the boom last year. Total global demand trends have not changed significantly -- greater demand growth in Asia has been offset by lower demand growth in Europe and the U.S. Furthermore, an unknown but probably large amount of the Asian demand growth represents stockpiling to hedge the large amounts of dollar-denominated debts held in Asian countries, the value of which in terms of both commodities and the euro has fallen dramatically with the fall of the dollar. I wouldn't be surprised if, for example, China chose to import more oil instead of depleting the reserves it owns, because it can pay for oil in depreciating dollars, which it acquires from exports but wants to quickly get rid of, while the value of the oil reserves it owns does not depreciate. We have effectively been making the same choice in the U.S. Oil exporters have similarly been deciding to pump less and discover more, i.e. build up their stockpiles (below the ground, where storage is cheapest for oil) as a hedge against inflation.
It's quite silly to believe that for more than 100 widely disparate commodities, the price of practically all of which have dramatically gone up in the last two years, there are dozens of largely independent bullish events -- a large number of independent political problems breaking out in most oil countries, miners of a wide variety of metals all suddenly (within the very same 2 years) finding they lack electricity, people after 10,000 years of agriculture suddenly deciding to eat much more meat, ethanol in those same 2 years driving up the price of corn (how does this explain the fact that the price of wheat and rice have gone up *faster* than corn?), "peak oil", "peak nickel", "peak zinc", and peak amost everything else hitting us at the very same time, ad nauseum.
If you believe in divine intervention, that the gods are intervening in extremely improbable ways in order to get us to "go green", perhaps you can accept this apocalyptic multitude of plagues hitting us all at once. But Occam's Razor, probability, and basic common sense tell us that we should look not for dozens but only one explanation for the across-the-board parallel rises in commodities prices. And we have a very good explanation, namely the dramatic increases in the supply of dollars, Ben Bernanke playing John Law by selling U.S. Treasuries and buying dubious mortgage-backed securities, and lack of a long reliable history which would otherwise make the euro a much more viable alternative for hedging the dollar. The most reliable stores of value and hedges against currency-denominated debt assets in today's world are commodities. The dramatic price rise reflects, in addition to the greater supply of dollars to pay for them, a greater demand to use commodities for their monetary properties.
Posted by: nick at May 15, 2008 5:05:31 PM
