Volatile Commodity Prices

Lots of reports today about a plunge in corn and other food commodity prices following good news from the USDA on plantings and progress of this year's corn crop.

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.

This volatility is exactly what economic models predict when inventories are low and cannot buffer weather shocks.  I expect to see even larger swings in late July and August, because it's weather in these months, and particularly the amount of extreme heat in the Midwest, that will determine the size of the corn and soybean crops.

But this volatility does provide a teachable moment:  it shows how sensitive prices are to small quantity changes.  That sensitivity provides some indication of how much ethanol could be influencing food prices globally.  And while long-run sensitivities are likely less than those in the short run, it also shows us how sensitive food commodity prices could be to even modest climate change impacts on US and world agriculture.