Inflation volatility does not go up with inflation

The story used to be that inflation was bad for an economy because greater levels inflation led to greater levels of inflation uncertainty.

Uncertainty isn't exactly the same as volatility, but in practice we often equate the two when we economists do empirical work.  So, while I'm not a macro guy, a long, long time ago I wrote a paper for a graduate macro class on the link between inflation and inflation uncertainty. I just used standard time series analysis to predict inflation and then looked at my prediction error in relation to the level of inflation.  I didn't see much of a link even then.

Today I see even less of one.  To be honest, I haven't run the regressions.  I'm just looking at this picture from FRED.

Back in the seventies and early eighties we might have logically conflated levels of inflation with inflation volatility.  But today, and over the past decade, inflation has been low and inflation volatility quite high.

The real macro guys probably have a good explanation for this.  But whatever it may be, I also wonder if somewhat higher rates of inflation--say the 3-4 percent we had in the 90s, would actually be more stable.

Could this be yet another reason to have a higher inflation target?

Mark Bittman Embraces the Food Nanny State

Bittman, who typically writes more about food (I love his minimalist recipes) and less about food policy, fully embraces the idea of taxing "bad" food and subsiding "good" food:

....Rather than subsidizing the production of unhealthful foods, we should turn the tables and tax things like soda, French fries, doughnuts and hyperprocessed snacks. The resulting income should be earmarked for a program that encourages a sound diet for Americans by making healthy food more affordable and widely available....

He gets into details:

...Sweetened drinks could be taxed at 2 cents per ounce, so a six-pack of Pepsi would cost $1.44 more than it does now. An equivalent tax on fries might be 50 cents per serving; a quarter extra for a doughnut. (We have experts who can figure out how “bad” a food should be to qualify, and what the rate should be; right now they’re busy calculating ethanol subsidies. Diet sodas would not be taxed.)...

Maybe those experts would be the same ones who brought us the Food Pyramid.

Anyway, this does seem like the kind of thing that could get messy.  Do I really need to point to our political environment?

Something simpler, like a tax on sugar-sweetened beverages may make more sense.  At least it's specific enough to get our heads around.  Also, sugar may also be *the* culprit in our obesity/diabetes epidemic. And apparently there has been some research on it:

Much of the research on beverage taxes comes from the Rudd Center for Food Policy and Obesity at Yale. Its projections indicate that taxes become significant at the equivalent of about a penny an ounce, a level at which three very good things should begin to happen: the consumption of sugar-sweetened beverages should decrease, as should the incidence of disease and therefore public health costs; and money could be raised for other uses.

I checked out the Rudd Center and found this study(pdf).  The crux, of course, is the elasticity of demand: how much will people cut consumption of sugar-sweetened beverages if they are taxed?  That is a very difficult thing to measure.  I've never seen it done in a truly convincing way.  It must be especially difficult in the soft-drink business given the market power of Coke and Pepsi and the complex strategic pricing games they must play with each other.  Regional variation in pricing must have a lot to do with regional differences in demand elasticities; cross-sectional regressions won't work (sorry if that's a bit wonkish--economists should know what I'm talking about).

Then again, I don't really know this literature well so maybe I missed the really compelling study.

Unfortunately the paper above doesn't help much.  It simply cites other work for the crucial demand elasticity, which they pin between -0.8 and -1.2.  If the number is -1 it says consumption declines by 1% for every 1% increase in price.  This assumes  that if we increase price of a 20oz soda from $1.25 to $1.45 consumption would decline by roughly 7%, holding all else the same.

I don't know if that is reasonable or not; I'd need to follow the chain of citations a bit more and dig into modelling assumptions and identification strategies.  Experience makes me dubious that the underlying economic science is very compelling, but I am prejudging here.

But let's just suppose that's right.

The biggest challenge I see is that diet drinks wouldn't be taxed and the best way to get a large demand response would be to cause the price of sugary drinks to go up while keeping diet drink prices constant. Now, it seems to me that Bitterman (and the underlying studies) assume full pass-through of the tax on retail price.  I'm pretty sure that won't happen in reality.

In reality Coke and PepsiCo will price beverage strategically, given they have considerable market power.  Given this, I would expect the big soft drink companies to increase the price diet drinks nearly commensurately with sugar drinks, and that the price increase would fall far short of the tax amount.  That's because prices will be tied first and foremost to the elasticity of demand, not marginal cost.

To prove my point, here's an example of a similar situation: The FAA tax on airlines expired last Friday night.  You might think that the tax expiration would cause airfare to go down commensurately.  Not.  Most airlines simply raised prices to by the amount of the tax. 

So, even the sugary beverage tax is likely to get complicated. And I'm quite sure Coke and Pepsi won't take this sort of thing lying down.

I'm not radically against the idea of a mild food-nanny state.  But I rather imagine that this kind of thing, if passed, might be far less beneficial and have far more unintended consequences than one might initially think.

Cotton prices tumble

Here's the story at the WSJ

Cotton prices, which surged to historic highs this spring, have plunged 38% so far this month, roiling mill owners and apparel makers.

It's a reversal for clothing makers that spent the last year grappling with higher costs and how much, if any, could be passed along to consumers. Now, retailers are wondering if lower cotton prices, off 53% since their March 4 peak, will last or if the roller-coaster ride will continue.

"There's never been this kind of volatility in cotton—ever," Eric Wiseman, chief executive of VF Corp, the world's largest apparel company, said in an interview on Thursday.

...

I guess I'd just like to note for the record that I called this one a long time ago. 

Maybe I just got lucky.

My juices are starting to flow for a nice long substantive post about price volatility. I should have time to write on tomorrow's travel day to the AAEA meetings.  Maybe see you in Pittsburgh.

The Latest Natural Experiment: Carmageddon

I predict: two years from now someone will present a paper in the EE session of the NBER summer institute that exploits Carmageddon as a natural experiment to estimate various acute effects of air pollution or some other consequence of reduced driving and congestion.  Maybe someone will try to extrapolate their findings to estimate the social costs and benefits of roads.

I have far less confidence that I will receive an invitation to said meetings.  Aw well...

Cool Heat Wave Video

Heat waves are not cool.  But the video below sure is.



Original source here.

Hat tip: David Lobell.

NOAA's 8-14 Day Temperature Outlook

Here's the picture:

Compare that to where crops are grown.

And consider that this is probably a particularly sensitive time in the growing season.

This makes me more bullish on commodity prices than the current drought map does:

Feeling the Heat in Kansas

Some are starting the emphasize the heat.  And they are at least acknowledging that it's really not so bad:  "...last month had been only the 26th hottest June in the past 117 years."   And while Kansas is looking pretty hot, it's often that way.  That's why it's the most irrigated state in the corn belt.  Every other corn belt state looks pretty mild and reasonably moist.  

They are forecasting a little 3-day heat wave over the next few days.  That's still a far, far cry from 1936.

So why do they have to bury reality way down on paragraph 15 or 20?

One worry about the premature, over-hyped drought stories is that when it really does get bad, everyone will yawn at the usual weather news drama. 

Dust Bowl II?

There's a lot more drought news these days (they gave me a quote all the way at the end of the story).  By some measures, particularly the US Drought Monitor, things look pretty bad.

But the time-series plot at the NY Times doesn't go back very far in time.  If it did, the current drought would look much less exceptional.  Also, the areas with severe drought are not very productive agricultural areas.  The Midwestern bread basket looks just fine right now.  Although the productive Mississippi Valley looks dry, crops there are irrigated, which should mitigate the damages.

Perhaps more importantly, standard drought indicators don't predict crop outcomes especially well.  I wish they'd emphasize extreme heat more than drought. I think we need our own "extreme heat indicator."  With any luck, we'll have one soon...

A larger concern could be the heat wave about to hit the midwest.  This is a bad time for extreme heat because corn plants are probably close to the flowering stage.  If it turns out as hot or a bit hotter than expected, and if that heat sticks around awhile, it will start looking real bad for corn yield.

The price volatility party is just getting started...

Volatile Commodity Prices

Lots of reports today about a plunge in corn and other food commodity prices following good news from the USDA on plantings and progress of this year's corn crop.

In just the last couple weeks corn prices have fallen from nearly $8/bushel to about $6.15.  All of that is due to a rather small amount of information about the progress of this year's crop.  Yes, there were reports of flooding and late plantings, but that kind of thing rarely has much effect on the overall crop production.  The late plantings just set up even more volatility going forward, since the plants will be  susceptible to extreme heat in July and August.

This volatility is exactly what economic models predict when inventories are low and cannot buffer weather shocks.  I expect to see even larger swings in late July and August, because it's weather in these months, and particularly the amount of extreme heat in the Midwest, that will determine the size of the corn and soybean crops.

But this volatility does provide a teachable moment:  it shows how sensitive prices are to small quantity changes.  That sensitivity provides some indication of how much ethanol could be influencing food prices globally.  And while long-run sensitivities are likely less than those in the short run, it also shows us how sensitive food commodity prices could be to even modest climate change impacts on US and world agriculture.

I Lean Dismal, But I'm Not a Malthusian

Following his big New York Times piece of food supply, demand and climate change, Justin Gillis has followed up with a series nice blog posts on the Times' blog called Green.

Here are the links:

Reverent Malthus and the Future of Food

Can the Yield Gap Be Closed--Sustainably?

Answering Questions About the World's Food Supply

F.A.O. Sees Stubbornly High Food Prices

World Food Supply: What's To Be Done?

These are nice articles and I highly recommend all of them.

In putting all the pieces together, I think it's important to see how different the current and potentially catastrophic future problems differ from old Malthusian notions.  As I've mentioned before, this is as much a global inequality problem as it is a food supply problem.

Economists have long complained about Malthusian types like Paul Erlich because they ignore or downplay the role of prices and incentives.  Economists have a good point:  if food commodity prices get high enough I believe it's clear we'll have the ability to produce plenty of food.  We could probably even grow that food with a lot less pollution byproducts.  But to produce that much food "sustainably" would require food prices so much higher than they are today.  And if food prices get that high, we'll be in solidly dismal territory for the world's poorest.

So there's the rub:  Price response works real nice if we're all relatively rich.  The problem is food commodity prices are so low they are basically ignored by consumers in rich countries.  But those prices are still high enough that a third of the world struggles to buy enough to meet basic needs.  This sits at the crux of why are not going to solve the world's food problems by having the relatively wealthy eat less meat.

Rubbing more salt in that wound is the uncomfortable fact that the historic path to development has been, at least implicitly, through cheap food.  I do think it's possible that high prices could be the catalyst for positive change in some places.  But it's already clear that institutional changes in the Middle East and North Africa are going to be slow and painful.  It's hard for me to be especially optimistic about the institutional and economic progress of poor countries in an environment with high and rising food prices.

I firmly believe that adapting to climate change (at least with regard to food production) would be relatively easy if everyone were as rich as the United States. But that's not the world we live in.

A Warming Planet Struggles to Feed Itself

The subject heading is the title of the front page article by Justin Gillis in this morning's New York Times.  It's a long multi-page feature.  It begins:

CIUDAD OBREGÓN, Mexico — The dun wheat field spreading out at Ravi P. Singh’s feet offered a possible clue to human destiny. Baked by a desert sun and deliberately starved of water, the plants were parched and nearly dead. 

Dr. Singh, a wheat breeder, grabbed seed heads that should have been plump with the staff of life. His practiced fingers found empty husks.

“You’re not going to feed the people with that,” he said.

But then, over in Plot 88, his eyes settled on a healthier plant, one that had managed to thrive in spite of the drought, producing plump kernels of wheat. “This is beautiful!” he shouted as wheat beards rustled in the wind.

Hope in a stalk of grain: It is a hope the world needs these days, for the great agricultural system that feeds the human race is in trouble.

The rapid growth in farm output that defined the late 20th century has slowed to the point that it is failing to keep up with the demand for food, driven by population increases and rising affluence in once-poor countries.

Consumption of the four staples that supply most human calories — wheat, rice, corn and soybeans — has outstripped production for much of the past decade, drawing once-large stockpiles down to worrisome levels. The imbalance between supply and demand has resulted in two huge spikes in international grain prices since 2007, with some grains more than doubling in cost. 

Those price jumps, though felt only moderately in the West, have worsened hunger for tens of millions of poor people, destabilizing politics in scores of countries, from Mexico to Uzbekistan to Yemen. The Haitian government was ousted in 2008 amid food riots, and anger over high prices has played a role in the recent Arab uprisings.

Now, the latest scientific research suggests that a previously discounted factor is helping to destabilize the food system: climate change.

Many of the failed harvests of the past decade were a consequence of weather disasters, like floods in the United States, drought in Australia and blistering heat waves in Europe and Russia. Scientists believe some, though not all, of those events were caused or worsened by human-induced global warming.

Temperatures are rising rapidly during the growing season in some of the most important agricultural countries, and a paper published several weeks ago found that this had shaved several percentage points off potential yields, adding to the price gyrations. 

...

I had one long phone conversation with Justin Gillis about this piece.  It was awhile back.  He had spoken with everyone and visited the major research centers.  By the time he spoke with me he really knew his stuff. It's nice work.  And it's nice to see this issue get front page billing.

I'm mentioned with Wolfram Schlenker in the section "Shaken Assumptions".

Price to rent ratio and interest rates

No time for thoughtful on-topic posts these days.  Hopefully one sleepless night soon.

Here's a quickie on one of my favorite off-topic subjects:

Bill McBride at Calculated Risk reports that the national price-to-rent ratio is back to 1999 levels.  That's well before the bubble took hold.  For those who look only at this ratio as a guide to home prices, that's probably a sign that prices have reverted to fundamentals.

But consider today's interest rates compared to 1999:

Today we're looking at a 30 year mortgage rate that is about two-thirds the level in 1999.

I'd say that makes prices today look like a really good deal, especially given anecdotal evidence that rents are on the rise.  When the economy does truly recover, those buying homes today will do very well.

Beneath national averages there is tremendous variation in price-to-rent ratios.  In some areas home prices are much more attractive than others.  That means home prices are a screaming deal in some places. Yet home prices are still falling.

I don't mean to give investment advice as much as point out how far off prices seem to be from fundamentals.  I'd say our problems with debt deleveraging and irrational pessimism remain quite severe.

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: