Showing posts from March, 2011

Cotton prices are going to fall

Cotton is the third most valuable crop in the US, after corn and soybeans. Cotton prices have roughly doubled over the last year, perhaps a bit more than other staple agricultural commodities.  The big difference with cotton is that it uses a much smaller share of the land base than corn, soybeans and wheat do.  That makes it a lot easier to proportionately expand production when prices rise.  And since it's a higher-value crop than corn, soybeans and wheat, that land expansion is going to happen, as described here in the New York Times today ... In the United States, the economics of growing cotton vary according to many factors, including regional differences and whether or not the land is irrigated. Farmers in several southern states said that at a cotton price of about $1 a pound, their profit could be roughly $200 to $500 more per acre than they could earn growing corn or wheat. For 1,000 acres planted in cotton, that means an additional $200,000 to $500,000 profit.

AMS Briefing on Capitol Hill

This morning's slides.  I believe slides with audio of the presentation will eventually be posted here . Open publication - Free publishing - More agriculture

Using quotas in procurement auctions

I have a new working paper with Daniel Hellerstein and Nathaniel Higgins (both with USDA) on the use of quotas in procurement auctions. This is a new area for us.  Our motivation came from thinking about the Conservation Reserve Program and a rapidly emerging literature on "payments for ecosystem services." Basically, the government or environmental interests or the carbon market or whatever wants to buy a lot of something--say carbon sequestration services, water quality benefits, wildlife habitat, etc.--from a large and extremely heterogeneous pool of sellers. One issue surrounding the heterogeneity of sellers is that we need to put the environmental services provided across varied landscapes, locations, and situations on an equal footing, which requires some method of valuing the environmental benefits.  That's a hard thing to do, but it's not new.  And I think people are already doing about as good a job as could be expected.  Or at least I don't think I&

Commodity Prices and the Fed

I think Mark Thoma nails this .  What he describes is exactly the way I think about the issue but have been unable to articulate. To answer the question in the title of this post, it's useful to think of an island with only two goods. One of the goods is non-renewable, but highly desirable. The other good is less preferred, but it is renewable (thinking of renewable and non-renewable energy resources, for example). The key is to distinguish between changes in prices that reflect changes in the relative scarcity of the two goods, and changes driven by increases in the money supply. Over time, as the stock of the more desired good falls due to consumption, the price of this good will rise relative to the renewable good. Consumers will be hit by increases in the cost of living -- the same basket of the two goods purchased last year now costs more. But is this the kind of increase in prices the Fed should respond to? No, the price increase -- and the increase in the c

It's always nice to have your research cited in testimony before Congress

In email this morning I learned that my work with Wolfram Schlenke r was cited extensively by Christopher B. Field in his testimony before congress (PDF). In today's New York Times our findings were obliquely referenced via Field.  Apparently his testimony "piqued the interest of members on both sides of the aisle."  The specific statistics cited in the New York Times come from our research results.  While the NYT is citing Field, you can see from Field's testimony that it comes from our work. One little quibble with Field's testimony.  He testified as if these are going to be adverse effects to the U.S.  Actually, US crop production getting hammered by climate change may be good for us.  That's because we export a good share of our crops and demand is extremely inelastic.  It's is quite likely that price increases will help farmers far more than the lower quantities hurt them.  The gain in domestic producer surplus could be so large that there co

Covariances reveal differences between supply shocks and demand shocks

This is for all the inflation mongers out there who think that today's oil price spikes are a prelude to hyperinflation. Up until a few weeks ago, demand factors were driving oil and other commodity prices.  When oil prices went up, so did the stock market and interest rates.  Aggregate demand shocks, the earlier drivers, were mainly good news about growth, and this drove up interest rates and the stock market.  They also signaled higher prospective inflation, which I saw as good news.  We could use a bit more inflation, given we remain well below target and there is lots of labor to sop up before wage increases (the main part of inflation) kick in. Over the last couple weeks, prices have spiked more sharply, but for very different reasons, mainly the quickly unfolding events in the Middle East.  Markets are speculating about a possible, if unlikely, major disruption in supply.  While oil prices have spiked, other commodity prices have generally softened, and the stock market a

Ethanol and food prices, again

Last week I served on a panel for the RTEC and gave my usual spiel about ethanol and food prices. In a nutshell: 1) Both supply and demand of staple grains are highly inelasitic. This means it doesn't take much of a shift in supply or demand to cause a big change in price. 2) The U.S. is hugely important in world grain markets.  With the largest share of world production and a much larger share of world exports, we drive international prices for staple grains. 3) Ethanol uses about 1/3 of the U.S. corn crop, or about 5 percent of the calories produced, worldwide, of corn soybeans, wheat and rice--the key grains that feed the world.  That's even with a bigger corn crop (and smaller soybean crop) that has been brought about by ethanol subsidies and mandates. 4) When prices go up, we in rich countries don't eat much less, since commodities are a trivial share of our food expenditures.  Those consuming less are most plausibly the world's poorest.  If not, who do

New, small farms with young hip operators

At least anecdotally, the local and small farm movement seems to be taking hold. In New Food Culture, a Young Generation of Farmers Emerges ...Mr. Jones, 30, and his wife, Alicia, 27, are among an emerging group of people in their 20s and 30s who have chosen farming as a career. Many shun industrial, mechanized farming and list punk rock, Karl Marx and the food journalist Michael Pollan as their influences. The Joneses say they and their peers are succeeding because of Oregon’s farmer-foodie culture, which demands grass-fed and pasture-raised meats.  ...The Grange master, Hank Keogh, is a 26-year-old who, with his multiple piercings and severe sideburns, looks more indie rock star than seed farmer. Mr. Keogh took over the Grange two years ago.  He increased membership by signing up dozens of young farmers and others in the region. He had the floorboards refinished, introduced weekly yoga classes and reduced the average age of Grange members to 35 from 65.  The young farmer

Public and Private Storage of Oil

I've been thinking and studying a lot about storage and commodity markets, mostly with regard to food commodities.  A grad student, Nam Tran, is neck deep solving stochastic dynamic programing models.  I'm pretty optimistic something good will come out of his dissertation--he's focusing on rice markets and the price spike in 2008. Anyway, the theory for oil isn't all that different.  In the news we're seeing a lot about the US strategic oil reserve.  Obama is thinking about selling some of our reserves.  Would this be a good idea? The thing to recognize is that the recent price spike is coming from private markets building up their own reserves.  Reserves have gone up about 4% since early January, perhaps a bit more depending on what the next report says. Markets are speculating that there may be an actual disruption of supply in the future.  If that happens, prices will spike, and so it makes sense to store a little more in anticipation of that possibility.  If