Another few plots on extreme heat and corn yields

This is similar to something I put up the other day, except with just three states: Iowa, Missouri and Minnesota.  That makes it a little easier to see. 

Also, David Lobell suggested my remarks about Kansas may be a little off since Kansas is so heavily irrigated.  It might be better to draw comparisons between non-irrigated states with different temperature profiles.

So these three states are about the same latitude.  Iowa is the nations sweet spot--the best soils and the best climate.  Minnesota tends to be a bit cooler than ideal; Missouri is too hot. 

I've also added a scatter plot to show the strong association between extreme heat and yield.  The outliers in the bottom left of the scatter (cool years with low yields) are from the Great Flood of 1993. I've added regression lines that fit the relationship separately for each state, one for 1980-1995 and one for 1996-2010.  While Iowa seems to show more heat tolerance in the more recent period, Missouri looks less heat tolerant in the more recent period.  But since Iowa really hasn't experienced any extreme heat since 1996, that flat curve is probably spurious.  Also, keep in mind there are no other variables here, and just a little bit of extreme heat probably means lots of beneficial, less-than-extreme heat.


(click for larger view)

When I have a little more time I'll try dig into this stuff a little more.  But so far we've found no evidence that crop varieties grown in warmer climates are more heat tolerant than those in cooler climates, and if anything heat tolerance is declining.

My awesome lack of political prescience: fiscal vs. monetary policy

Way back in the early days following the financial crisis, I complained a lot about there not being enough talk of inflation targeting and unconventional monetary policy.  At the time I imagined that not doing enough on monetary policy in response to the  crisis would give rise to future monetarists who would claim, much as Milton Friedman did about the Great Depression, that all could have been avoided if only the central bank had done its job correctly.  I really thought vigorous monetary policy was the best hope for quelling the Great Recession. 

I was particularly disappointed in Paul Krugman for not pushing the idea of inflation targeting or other unconventional monetary policies more forcefully. (He clearly supported the idea, but said very little about it.)  After all, he had long been the main force underpinning this idea for Japan a decade earlier.

In hindsight, mine was a rather foolish prognostication.  Today's conservatives are nothing like Milton Friedman.  They are as against active monetary policy as they are against active fiscal policy.  Much of this may just be political convenience.  Perhaps they simply want what's bad for the economy because they see a bad economy as politically good for Republicans.  It's not hard to be that cynical, especially in today's political climate.

Anyway, I recollect all this in response to this post by Paul Krugman and this post by David Beckworth.

Big Brothers

Orwellian indeed.  Maybe Ayn Randers should be more inspired by Orwell's Animal Farm than by 1984.

Via Catherine Rampel we have Kris Hundley:

A conservative billionaire who opposes government meddling in business has bought a rare commodity: the right to interfere in faculty hiring at a publicly funded university.
A foundation bankrolled by Libertarian businessman Charles G. Koch has pledged $1.5 million for positions in Florida State University's economics department. In return, his representatives get to screen and sign off on any hires for a new program promoting "political economy and free enterprise."

Traditionally, university donors have little official input into choosing the person who fills a chair they've funded. The power of university faculty and officials to choose professors without outside interference is considered a hallmark of academic freedom.

Under the agreement with the Charles G. Koch Charitable Foundation, however, faculty only retain the illusion of control. The contract specifies that an advisory committee appointed by Koch decides which candidates should be considered. The foundation can also withdraw its funding if it's not happy with the faculty's choice or if the hires don't meet "objectives" set by Koch during annual evaluations.

David W. Rasmussen, dean of the College of Social Sciences, defended the deal, initiated by an FSU graduate working for Koch. During the first round of hiring in 2009, Koch rejected nearly 60 percent of the faculty's suggestions but ultimately agreed on two candidates. Although the deal was signed in 2008 with little public controversy, the issue revived last week when two FSU professors — one retired, one active — criticized the contract in the Tallahassee Democrat as an affront to academic freedom....

There was mention of UNC schools in some of this.  Despite the pronounced Libertarian influence here, I really hope NCSU doesn't have these kind of financial ties.

Counting the reasons for a higher inflation target

While Paul Krugman and Greg Mankiw both explain that inflation is no threat, allow me to follow Brad Delong by listing all the reasons I know for why the Fed's current nominal inflation target of two percent (one percent in practice) is too low.

1) To maximize long run stability, the Fed should target a long-run price level, not a long run inflation rate.  This way long-run investors can be reasonably assured of a particular long-run real rate of return for any given investment paying nominal dividends.  The idea is that the Fed would thereby promise to correct short-run variations in inflation leading to less long-run mis-pricing of expectations and assets.  Now, since inflation of the last few years has been well below target, it would therefore help restore pre-recession expectations if the Fed were to pursue higher inflation for at least a few years.

2) A higher inflation target will reduce odds of hitting the zero lower bound in future crises and recessions, thereby reducing odds of liquidity trap situations like the one we are currently in.

3) To aid the current unusually bad economic situation by encouraging spending now while the general price level is low.  This is what Krugman has often described as a "commitment to be irresponsible."

4) To accelerate deleveraging of both private and public debts, thereby aiding spending and growth in the short run (in some ways similar to 3).

5) To encourage somewhat higher nominal interest rates once the economy reaches full employment, thereby reducing the incidence of asset bubbles which can be spurred by low nominal interest rates.

6) To lessen the negative impact of rigidities in nominal wages, particularly downward rigidities.  And some compelling theoretical work that fits these facts suggests a higher target (say 3 or 4 percent) would be better for long-run growth.

So, what are the downsides to a somewhat higher inflation target?  I can think of a few, but I think they are rather mild. One argument in the literature is that a higher inflation rate is also more uncertain.  But level and variability are different things.  Point (1) is a better way to deal with uncertainty in inflation.  And I also know from some dabbling I did for a class paper many years ago that, at least for the U.S., evidence of a negative uncertainty effect is extremely thin.  The best argument I can think of is that by changing the inflation target to something greater than 2 percent now will hurt the Bernanke Fed's credibility given they have so vigorously defended a 2 percent target (or something less) up to this point. Thus, if the Fed changes their target now, markets may be less inclined to believe the new target going forward.

The obvious, reasonable answer to the last conundrum is for the Fed to simply lay out its rationale for changing the target.  But since many have built in expectations of a lower target, the Fed would plan to implement the new target gradually, and (preferably) more explicitly.  That is, they could lay out a clear goal for a long-run price level that they would like to achieve going forward.  That target schedule could incorporate a gradual acceleration of inflation to the new target level.  All of this would, of course, be accompanied by the usual caveats that the target would sometime miss too low and sometimes miss too high, and that other mitigating circumstance could make achieving the target more difficult at some times as compared to others.

Anyway, that's my armchair macro thought of the day...

Goldman Sachs DID NOT Cause the Food Crisis

I haven't been, and will not be able to, respond to this silly article in Foreign Policy (no link--they don't deserve it).

So, let's just make this a place holder for now: Goldman Sachs, as evil as they may have been in facilitating the demise of AIG and causing the financial crisis, did not cause the food crisis.

Somehow, some way, we economists need to educate the public about when speculation is good (most of the time) and when it is bad (e.g., the 90s tech boom and the housing bubble).

At least so far, we haven't seen the bad kind of speculation when it comes to food commodities. Maybe it will happen in the future--in fact, I kind of worry we may have a problem in the coming years.  But so far, no.

The basic fact is the following: If prices are high when inventories are low, it is not a bubble.  End of story.

The tough call is going to be when prices are high and inventories are high.  That's not happening right now. But if it happens in the future there will be lots of hopefully intelligent debate about whether expectations about future growing demand or future shrinking supply are or are not reasonable. But right now, and in the recent past, the point is moot. Inventories are low.  Prices are driven by fundamentals: supply and demand.

Why the slowdown in agricultural productivity growth?

Two words:

Climate Change  Global Warming.

Well, there may be more to it.  Like reduced public research and pathogens like wheat stem rust.

But new research by my colleagues David Lobell and Wolfram Schlenker, along with Justin Costa-Roberts shows that warming has hurt corn and wheat yields on all continents except North America:

Farms across the planet produced 3.8 percent less corn and 5.5 percent less wheat than they could have between 1980 and 2008 thanks to rising temperatures, a new analysis estimates. These wilting yields may have contributed to the current sky-high price of food, a team of U.S. researchers reports online May 5 in Science. Climate-induced losses could have driven up prices of corn by 6.4 percent and wheat by 18.9 percent since 1980.

The article was embargoed until 2pm today, but it's already circulating.

A few other links:

Science News
Washington Post
UK Gaurdian
New Scientist

In my view, what's ominous here is that we're probably already seeing noticeable effects from climate change even though the world's biggest producer and exporter---the United States--hasn't seen any negative consequences.  Yet.  From the projections I've seen, that's mainly good luck.  It's been cooler here than in the past.  If (er... when) it warms here as projected, then we'll really feel the yield drag.

Perhaps I'm being knit picky, but I find the comparison with 1980 prices to be a strange baseline.  Prices are very sensitive to quantities.  It's not a question of where prices would be today in comparison to 1980.  It's a question of where prices would be today without the warming.

If quantities are some 5% lower than they would have been without warming, my own work on global supply and demand elasticities with Wolfram Schlenker suggests prices would be some 30% lower than without climate change.

Maybe this is a tongue-in-cheek way of being conservative.  But it just isn't right.

Update (wonkish clarification): My workhorse model here is just supply and demand.  That model tells me that, looking broadly across staple food commodities and globally in scope, the world demand elasticity is in the ballpark of 0.05 and the world supply elasticity is in the ballpark of 0.10.  To the extent that one is too big, the other on tends to be too small, and vice versa; so I'm more confident in the sum than the individual elasticities.  These numbers mean a inward shift in supply or outward shift in demand of 1% will have a 1/(0.15) or a 6.7% increase in price.  I was being a little conservative with a 6-fold larger price increase than the climate-induced quantity shift, partly because the quantity shift they estimate is a bit less than 5%.

Extreme Heat and Corn Yields--a 2010 Update

So we finally have an update of our weather data, following from the hard work of an NCSU graduate student, Jon Eyer.

Here's a preview of what that data shows (click for a larger version):

The left panel shows degree days above 29C, measured continuously over time and space and averaged over growing areas.  The right panel shows corn yields, in bushels per acre.  The inverse relationship between extreme heat and yields is fairly clear.  The one big exception is 1993 when a flood damaged yields severely even though it wasn't very hot.

Three things to note:

First, 2010 was hot, but not nearly as hot as it has been.  Given how bad things were relative to expectations, I was expecting a much higher extreme heat measure.  Our basic regression model pretty much hit the 2010 yield on the nose, so markets (and the USDA) shouldn't have been surprised conditional on the heat.

Second, projections under most climate change scenarios are a lot worse in the coming years.  Overall, weather has been strangely good in the U.S. in recent years.  If it stays as cool as 2010, we'll be lucky.

Third, last summer I inadvertently provoked a sharp response from Ted Crosbie of Monsanto by suggesting corn tolerance to extreme heat has been declining over the last few decades.  Despite Dr. Crosbie's feelings on the issue, I think there is some tell-tale evidence of just this phenomenon in the graph.  Kansas, which is significantly hotter than the other big corn states, had yields similar to the other states 30 years ago.  But today Kansas yields there are much lower.  I think this is interesting because in earlier work we identified the phenomenon of declining heat tolerance by looking exclusively within states, not at differential trends across states. Also, this pattern doesn't require fancy non-parametric statistics--it's easy to see with the naked eye.

Declining crop yields

There are many reasons for high commodity prices.  But recent data from FAO shows a pretty rapid slowdown in productivity growth.  The price spike in 2008 occurred in a particularly bad year in which yields declined on a worldwide basis for three of the four largest food commodities.  In 2009 all four of the majors saw yield declines, something that hasn't happened since 1974.  2010 couldn't have been much better and was probably worse, given how bad things were in the U.S, the world's largest producer and exporter (worldwide data for 2010 isn't available yet).

Here's the picture:

The yield slowdown comes at a particularly unfortunate time, with accelerating demand from emerging economies like China and subsidy-driven expansion of ethanol.  Keep in mind: we need productivity growth to accelerate considerably to keep up with projected demand growth.  FAO says we need 70 percent higher yields by 2050.  (Although I'd like to do my own projections, and will one of these days...)

Maybe it's just bad luck with the weather.  But I think it just may be a longer run phenomenon.

Yeah, resource scarcity will be in the news for awhile yet.

Update:  Lots of interesting commentary over at Mark Thoma's blog.  Nice of him to feature this post! (Thanks Mark!).  One question came up about planted area diluting yields through expansion onto marginal lands.  There might be some of that.  But I think it's mainly a combination of weather and slowing technological progress in breeding.  Cutbacks on basic science research do have consequences.  And so does climate change, even if it hasn't affected the US, yet.

Anyway, here's the graph for planted area: