Showing posts from January, 2011

Why hasn't the price of meat gone up?

On an earlier post someone asked:  Why, with commodity prices so high, hasn't the price of meat gone up? I have two basic answers. 1) Meat, especially if we're talking about meat you buy in the grocery store, is ultimately derived from commodities like corn and soybeans, which are the primary source of animal feed.  But there are a lot of steps involved with raising the animals and processing and marketing them.  So the price of meat, like most everything else we buy, is mostly made up of labor costs along that chain, not the price of the raw material inputs.  This is why we here in rich countries hardly perceive the effects of rising commodity prices (except maybe for gas), but folks in places like Egypt who are living on $2 day can feel the higher price of wheat in a way we just cannot comprehend. 2) There can be a long lag between the time when corn and soybean prices rise and meat prices rise.  In fact, in the short run, meat prices can fall because meat producers, sq

Commodity price rises are fundamental, not monetary

I liked Paul Krugman's column today . One thing he did not exactly say but I wish he had:  Commodity price rises have little to do with monetary and currency policies in the US and around the world.  To the extent that they are connected, they are connected through the market's attempt to correct long-held imbalances, particularly China's undervalued currency.  China's inflation is the market fighting that undervaluation, and that inflation is helping to spur demand for commodities.  But what's important to note is that the underlying demand is fundamental: it would have been there long ago except for China's past suppression of it through currency policy.  By the same token, China's inflation is helping to balance our trade deficit. We'd be wise to think about possible collateral damage of higher commodity prices, since I suspect high prices could be here to stay.  But this really should have no bearing on monetary policy.

Commodity prices and speculation, again

The other week I got a list of questions from a journalist at China's Life Week , which is presumably the country's biggest news magazine. The journalist asked: 1.     The U.N. Food and Agriculture Organization's index of world food prices rose 32 percent in the second half of 2010, topping the peak of June 2008. In your analysis, what are the major reasons for such a great increase in a short time? 2.       In your analysis, how much does the food speculation influence current high food price? 3.       Money began to be taken out of the index funds in the couple of months before food prices began to fall dramatically in mid-2008. What about the situation in 2010? If the moneys pour into the field again, why? 4.       In the past 2 years after food crisis in 2008, how did the biofuel develop around the world? 5.       In your analysis, how much does biofuel influence current high food price? How? 6.     U.S. government makes great effort to develop biofuel. What are the

A different kind of commodity price boom

The other day I wrote that even blind optimism doesn't imply declining resource prices.  Let me try to flesh that idea out a little. A key idea in natural resource economics, called Hotelling's rule, says that non-renewable resource prices (oil, natural gas, coal, etc) should rise at about the rate of interest. The basic idea is that natural resources held in the ground and not sold need to earn a fair return, just like any other asset. That hasn't happened.  The long-run trend has been flat or downward (the last few years exempted). Most economists have argued that the reason prices haven't increased is because extraction costs have declined.  There have also been some complicated stories about depletion effects on extraction costs.  These cost-related factors are very important for individual extracting firms, and may explain falling prices for a little while.  But costs cannot really reconcile broad resource price trends with Hotelling's rule, which actuall

Tyler Cowen on Resource Prices

Even a Libertarian thinks resource prices may rise : How robust are Julian Simon's predictions? Not the ones about population, the ones about falling real resource prices. Here is a simple model: it is easier to transfer technologies of resource extraction than it is to transfer most other technologies.  In other words, Nigeria has low TFP but still their oil rigs work pretty well. If that's true, when the wealthiest economies are opening up a commanding lead in terms of living standards, real resource prices should be falling.  Nigeria can supply a lot of oil without demanding very much. When most of the growth is catch-up growth, the poor countries demand more resources but supply technologies are not racing so quickly ahead.  Real resource prices are more likely to rise. There is a long history of falling real resource prices, but is this simply reflecting the fact that the last three hundred years don't offer many periods of catch-up growth?  Now, an era

The Right Graph Makes All the Difference

I'm a huge proponent of the idea that the right graphical presentation of data makes all the difference.  Our eyes interpret mathematical data much better than reading numbers could, even if you're a mathematician.  Sometimes graphs can lie, like statistics, but the the lie is usually easier to spot. Case in point: A graph of the log income distribution and why the rich don't feel so rich, via Catherine Rampbell (always awesome), Brad Delong and Paul Krugman. I've read zillions of statistics and have seen a lot of excellent graphs on the income distribution. But this really brings it home in a salient way.  Indeed, I hadn't even realized the graph of log income looked like this.  And I've seen the data a lot of times in a lot of ways. People usually hang out with people more-or-less like themselves, in terms of income and other demographics.  Now, if you make 250K/year, it's likely that a lot of your friends make twice as much or more than you do. 

Food fights, price bets, and the difference between linear and exponential trends

Dot Earth just did a nice piece on my recurring focus:  Food commodity prices.  I found it from a link via Paul Krugman . The long trend down in commodity prices has come about through tremendous, technology-induced growth in crop yields. What is often overlooked, however, is that that yield growth, while impressive, has been linear .  Demand growth, in contrast, has been exponential , or at least rapidly accelerating.  For the last 70 years, the rate of yield growth has generally exceeded the rate of demand growth.  But that accelerating demand growth has now caught up and surpassed yield growth.  And so now prices are rising, not falling. So, it's just not enough to point to historically falling prices and say that's going to continue.  Show me how yield growth is going to start accelerating like demand growth.  Show me how we're really going to do that and deal the detrimental effects of climate change . The more I look at the specifics, the more I think progr