Will resource constraints bind in the next boom?

I'm kind of seeing the same thing as Paul Krugman here:

The Oil Bubble Controversy, Revisited

One of the curious things about economic debate in the later Bush years was the conviction among many on the right that there wasn’t a bubble in housing, but that there was one in oil.
We now know the truth about housing. But what about oil?
Oil prices did spike to triple-digit levels in early 2008, then drop sharply. But think about the fact that right now, with the world economy still seriously depressed, oil is at $80 a barrel. This suggests to me that high oil prices are largely caused by fundamentals.
And it also suggests that resource constraints will be an issue if and when we do get a full recovery.
But I'm looking more at agricultural commodities.  While prices have come down a lot from the summer of 2008 I didn't see a lot of evidence of a speculative bubble then.  And I would have thought that a worldwide recession a large as the one we're in would have pushed prices down more than they have.

I expect prices will go up a fair amount when the world really recovers from this mess.

The other person I pay attention to on these issues is Jim Hamilton, who sometimes has a different point of view.  He has seen evidence of hoarding in China, which may be keeping prices higher than they otherwise would be.

Comments

  1. Good post. Isn't ag commodity demand much less responsive to economic conditions that energy demand, though? Those fortunate enough to consume sufficient calories might eat more meat and waste a bit more when times are good, but you can only eat so much...

    It would be interesting to know 1), how much per capita food consumption varies with GDP growth, and 2), the gap in agricultural land footprint and energy footprint between rich and poor countries. If you buy this data, U.S. per capita oil consumption is ~5x Brazil's, ~12x China's and ~30x India's; I don't see how the range for agricultural footprint could be as high.

    By the way, hard to tell the extent financial speculation played in ag commodities leading up to 2008, but there was definitely other behavior (e.g. export bans) that kept supply off of world markets and exacerbated already high prices.

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  2. throw higher interest rates into the mix..would supply of agricultural commodities decrease, further pressuring prices upward?

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  3. R:

    As a counter example I'm thinking of the Asian financial crisis in the late 90s. That really pushed down commodity prices via a demand effect, or so it seems to me. Relative to the size of the kind of demand effect of this recession, it's kind of remarkable how high prices have stayed.

    I should have mentioned: The one place where there may have been a bubble was rice. But then all kinds of trade-related stuff going on in that market could have really messed up expectations in a more-or-less rational way.

    I'm not sure what the U.S. agricultural footprint is. That's a good question--it's something I could and will calculate one of these days. It shouldn't be that hard. But I'm guessing it isn't too far from our relative energy footprint. That could happen because we eat so much meat, dairy, and cheese, and eat out in restaurants which can waste food. Not to mention the fact that we consume way more calories.

    J: Hmmmm. Higher interest rates... That's an interesting thought. I don't think we're going to see much higher interest rates for awhile. But here the story is a little more subtle. Prices tend to trend higher when interest rates are higher, but a *change* in interest rates, from something low to something high, increases the cost of storage. This, at least in theory (but also in fact) will cause speculators to dump their inventories, causing prices to fall, not rise.

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  4. Good point about the Asian financial crisis – I had never thought about it in that light before.

    Here’s a quick-and-dirty calculation on per capita ag footprint, from which I conclude that the U.S. per capita ag footprint is ~2.3x India’s. Back-of-the-envelope is that U.S. eats ~70% more calories, gets 23% of calories from meat/dairy compared to 6% in India, and uses 3.4 kg of feed per calorie of animal product vs. 1.8 kg since U.S. is more heavily weighted toward meat.

    I didn’t include waste because while consumer waste is much lower in developing countries, harvest and post-harvest waste is much higher; even if we do assume the U.S. wastes 40% and India only 10%, the ratio only jumps to 3.3x – still an order of magnitude less than the oil consumption differential of ~30x.

    My assumptions may be off, so corrections are welcome!

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  5. Your construction seems reasonable but somehow 2.3 looks low to me. You're probably right that the ratio isn't as high as it is for energy.

    I've calculated that the U.S. produces about 23% of world caloric production of staple grains and oils, and we are the largest exporter. But still we only export a fraction of total calories produced--I'm not sure about that number, but I'm guessing we export about 20% of what we produce. So, if we consume about 18% of the world's calories and have less than 5% of the world's population, on a per-capita basis I'd guess we consume somewhere between 3.5 and 4 the world average. That's totally off the cuff.

    I like this way of putting things in perspective, though. I'll try to do something more careful one day soon.

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  6. Those numbers provide a good reference and double-check – thanks for posting.

    One factor that might explain the gap between your number and mine is that most livestock in the developing world are not grain-fed – cows eat crop residues and grass, chicken eat bugs, etc. So the primary agricultural footprint is considerably larger than just world production of staple crops and oils, and the U.S. share of this total would be smaller than 23%.

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