Showing posts from November, 2011

On Futures Markets Convergence to Spot Prices

This is a bit wonkish.  It also contains a lot of preliminary thinking on my part, so caveat emptor.  If I'm wrong about any of this, I'll owe up to it sooner or later, and hopefully sooner. Futures markets are super useful things.  They allow a farmer to lock in a selling price for his grain before incurring all his production expenses, thereby limiting his risk.  And they allow an ethanol plant manager to lock in her buying price for grain before scheduling a delivery of fuel, thereby limiting the ethanol plant's risk. Thus, futures markets are generally wonderful things, allowing people to coordinate and plan production and consumption a little better over time, and thereby improving the efficiency of markets. In recent years there has been a big inflow of money from Wall Street into commodity futures.  Basically, there is a ton of money out there looking for someplace to hide in the crazy, fearful world of international financial markets.  Commodities h

Evidence-Based Macroeconomics, Firemen and Fires

The firemen came and put out the fire.  They kept the fire from spreading further, but not before a number of homes burnt down.  Now the townspeople are standing around the smoldering ruins, looking up at the firemen, and a scandalous rumor emerges:  that the firemen started the fire. Via Paul Krugman, here is a really wonderful talk by Chistina Romer on the effects of fiscal stimulus. Her challenge is to convince people that the Obama administration's big stimulus was actually stimulative, even though, despite the stimulus, the economy is still in ruins.  The challenge is that stimulus is like firemen: we only use it when disaster occurs.  It makes some important and powerful points about why people should believe fiscal stimulus is in fact stimulative.  But perhaps even more than that, it's wonderful in its clarity about (a) how important empirical answers are, (b) how difficult it is to obtain empirical answers to big economic questions, and (c) that good empirical ec

Report on Farmland Values

Via Kay MacDonald , I just saw this report by the Kansas City Fed on farmland values. Some impressive gains! They really should show a plot of value per acre, adjusted for inflation.  The cumulative sum of those plotted changes would be staggering. The Fed obviously has different farmland value data than the USDA.  I'd be real interested to know the details of how values are calculated.  Since there are so few land transactions I'd worry a little about parcels being comparable over time.  It's probably a small issue, though. Markets obviously expect to see commodity prices staying high for some time to come. I'd also guess there's a lot of cash out there looking for a place to earn more than 0.1% in a money market account.

Watch out for the ACRE program

With high commodity prices and booming farm profits, agricultural subsidies of the traditional kind have been trending down in recent years.  Of course, this doesn't count the huge subsidy implicit in the ethanol mandate and subsidy paid to blenders. But I'm wondering whether the ACRE program could be a big issue going forward.  Its intent was to provide insurance against a broad decline in revenue per acre (price multiplied by yield).  It achieves this by giving farmers a payment based on state-level revenues falling below 90% of a five-year average.  This old Q&A by Bruce Babcock and Chad Hart explains some of the finer details. The ACRE program, established in 2008, has had relatively modest participation so far.  The low participation rates likely follow from the fact that the five-year historical average price is really low relative to what farmers now expect going forward.  As time goes on, and recent higher prices get folded into the 5-year baseline guarantee,

Oil Inventories and Prices Since January 2007

Here's a plot of US oil inventories (less the Strategic Petroleum Reserve) and WTI spot oil price since January 2007.  I was motivated to do this because a commenter suggested I was misleading people about what was going on with inventories around the time prices spiked in 2008.  I recall following this at the time and didn't think I was misleading anyone.  But then it's always good to go back and check the data, since I do promise not to mislead. So here it is.  Inventories were stable to declining when oil prices spiked.  When the financial crisis hit in October 2008, growth prospects fell through the floor immediately, and then inventories started to grow.  This looks like textbook commodity prices to my eyes. No telltale sign of a bubble anywhere. If it were a bubble we'd need inventories building somewhere.  That might have been in other countries or withheld supplies by producers with excess capacity.  But I haven't seen any evidence of that either.  A