Tuesday, March 27, 2012

8 February 2011 – Grain drain


I’m sure we all remember the 2008 crisis in food prices engendered by the high price of grains, especially corn, resulting from speculation as farm cropland was diverted to the production of species optimized for the production of ethanol for motor vehicle fuel (the UN Food and Agriculture Organization reported on it here.

The purpose of this post is not to debate those policies (although thoroughly unsurprising news continues to come out even today, e.g. the closure of a cellulosic ethanol plant in Georgia after making just one batch of fuel-grade product [note A], and the acknowledgement by leaders in the US ethanol industry that profitability depends heavily upon the $0.45 per gallon federal subsidy [note B]), but rather to try to put price behaviour in a little historical context.  This is worth doing as prices are likely to rise again this year, if not skyrocket, due to the continued drain on US corn stocks by the ethanol industry. According to Reuters, the end-January figures for US corn stocks are likely to be around 728M bushels, more than 40% below the figures for 2010 (1.7B bushels) - the lowest they’ve been in 15 years (Note C).

A recent paper by Daniel A. Sumner, an economics professor at the University of S.C. Davis, offers a little more perspective on the “historic” food grain price inclines and declines of the past few years.  Adjusting for constant dollars, Sumner tracks the price of wheat and corn from the end of the Civil War to 2008, showing how real prices fluctuated in response to various global events and trends.  Figure 1 of his paper, for example, shows clear spikes concurrent with the First and Second World Wars, an inter-War trough resulting from the Great Depression, and a smaller peak concurrent with the recession resulting from the 1973 oil shock.  Against these enormous fluctuations, the price increase that took place in the 2007-08 period was, proportionally speaking, rather minor.

As Sumner points out, one of the key reasons that the 2007-08 price increases seemed comparatively enormous is the fact that the real price of primary food grains has fallen precipitously over the past century and a half.  As the data charts show, the history since 1948 is particularly remarkable.  In the wake of the Second World War, the average price of both corn and wheat has fallen by approximately 2.3% per year for a 61-year period.(Note D)  The rapid and sustained decline in prices made the massive jump in 1973-74, and the comparatively minor jump in 2007-08, far more noticeable.
To better illustrate the changes, Sumner charts the upside and downside price deviations in percentage terms (figure 2, below). 

This helps to make the relative scale of price increases and declines more evident.  It is worth noting that, for reasons of scale, the chart fails to show the full scope of the two largest upside adjustments of the past century; in 1901 the upside adjustment was 88%, and in 1934, 117%.  Against these figures, the 60% increase in 2007-08 looks more alarming; proportionally speaking, it was the fifth largest grain price increase in the past century and a half.

One of the things that becomes instantly obvious from looking at Figure 1 is the massive decline in food grain prices over the past 150 years.  Sumner charts prices from 1948 onwards in his Figure 3 (page 4 of his paper), but it’s worth going back to the US Department of Agriculture site for the full run of data in order to push the charts back a little further (prices are available from 1866 onwards, but due to limited availability of CPI data for real-dollar conversion, I’m only looking at the post-1929 period).  You also have to convert prices into constant dollars, but those figures are available from the US Bureau of Economic Analysis, and the calculations aren’t all that complex for anyone reasonably familiar with economics, statistics, MS Excel, and division.  What you get is this:

What this chart shows is that, for the past 80 years, the real cost of food grains has been declining steadily.  The proportional rate of decrease in prices, moreover, as you can see from the near-identical slope of the linear trend-lines, is virtually the same.  What this means is that it has become a lot cheaper for the world to feed itself - hard data that refutes not only gloomy old Thomas Malthus, but also more recent prophets of doom like Paul Ehrlich, whose 1968 book The Population Bomb began with the phrase, “The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate…”.  Rarely has a piece of predictive futurology been so magnificently and so comprehensively wrong.

That sort of chart simply begs for explanatory correlation.  There is of course no end of correlating phenomena.  The first one that pops immediately to mind for students of economics and history is, obviously, sunspots.  After all, it was the inverse correlation between sunspot records and wheat prices printed in Adam Smith’s The Wealth of Nations that was first noted by William Herschel in 1801, prompting the astronomer to posit a relationship between solar activity and terrestrial climate.  These data are also available, courtesy the National Oceanic and Atmospheric Administration.  The result is shown in Figure 4.

This figure is also interesting because it demonstrates how loose the correlation between grain prices and sunspot numbers has become in the past century.  Where Herschel noted an obvious, close inverse correlation between the phenomena (meaning high sunspot numbers, and therefore high solar activity, were closely correlated with better crop yields and low grain prices), what we see is a lot messier.  During the Great Depression, a period of low solar activity led to rising prices (1933-1939); and prices fell in the early years of the Second World War, when solar activity was high.  Both of these correlations tend to confirm Herschel’s interpretation.  So does the high price of grain during the low solar activity period in the late-1940s.  After this point, however, grain prices begin to fall precipitously, and continue to decline even during the low solar activity of the late 1950s (falsifying Herschel). 

High solar activity in the early 1960s seems to accelerate the price decline (again confirming Herschel); but despite a price bump in 1964-65, prices fall even further during the low solar activity of those years (a falsification).  Prices jump significantly during the solar decline of the early to late 1970s - but as this period is associated with the galvanizing effects of the 1974-74 recession, the data should be treated with a good deal of caution - as should the price bump of the early 1980s, which is (counter-intuitively) associated with high solar activity, and also (very intuitively) with the 1983-84 recession.  Both prices and solar activity fall in the late 1980s, again falsifying Herschel.  The bump in the early 1990s could be due either to increasing solar activity or to the S&L scandal.  Climbing prices coincide with low solar activity in the late 1990s, and low prices with high solar activity around 2001; and, as already noted, prices climbed significantly in the 2007-08 period, correlating with the lowest solar activity levels in a century.  These latter data also, interestingly, confirm Herschel - although as was the case with the wars and recessions of the past, it is always important to recall the impact on prices of economic events and political decisions.

What these results suggest is that the relationship between solar activity levels and grain prices first posited by Herschel more than two centuries ago remains valid, but is subject to being overwhelmed by external political and economic phenomena, all of which are inevitably of governmental or intergovernmental origin.  This in turn suggests a reversal of what, until very recently, was an iron law of the relationship between human political activity and the food supply.  Where once all political activity - war, trade, colonization, expansion and what-not - was dependent to a great extent on the availability and therefore the price of basic foodstuffs (e.g., on the provision “by divine providence” of a bountiful harvest), since the end of the Second World War, the price of basic foodstuffs has depended less on factors relating to the physical environment than on the nature and impact of political decisions made by governments.  In other words, the price of food - and for that matter, the extent to which a harvest is or is not “bountiful” - is now, and has for some time, been subject more to human than to solar influences. 

If this conclusion - in an era of mechanical planting and harvesting, chemical fertilizers, selected and genetically engineered species of wheat and corn, and international, globalized trade in food grains - sounds like a statement of the blindingly obvious, I agree wholeheartedly.  But if it is blindingly obvious, then why do we continue to see articles and books predicting the coming nutritional apocalypse, ranging from Ehrlich’s demented screed to more recent predictions of impending agricultural doom?  And why, if the impact of political decision-making has for at least the past 60 years demonstrably and completely overwhelmed any solar or other nature-derived influences on the price of basic foodstuffs, do futurologists insist, against observed evidence, that “changing weather patterns...will likely disrupt global agriculture and diminish food security?”

Not to put too fine a point on it, but the answer, in all likelihood, is that “things are fine and food is cheaper than ever” doesn’t sell either books or policy positions.  Nor, one suspects, are governments all that keen on admitting that, since 1948 at least, unsound political and economic decisions have had a far more deleterious effect on food prices than bad weather.



P.S.  Another piece that caught my attention this week was the report of a wolf attack on a cow in Idaho (Note E).  This piqued my curiosity in the context of a report from a few weeks back that a Norwegian boy had averted a potentially fatal wolf attack by playing a Megadeath song on his cellphone.  This was, of course, complete balderdash; the boy saved himself by treating the wolf to Creed’s album, “Overcome” (Note F).  Poor wolf; I’d run, too.

Interestingly, we have a much longer data baseline for wolf attacks than we do for grain prices or sunspot numbers.  Just to ensure that my data and interpretations were accurate, I decided to graph fatal wolf attacks against humans (data from Note E) opposite grain prices and, for good measure, the global average temperature anomaly.

It’s fascinating to note a correlation, at least over the past 80 years, not only between slowly rising temperatures and declining grain prices (which, when you think about it, makes sense), but also between rising temperatures and an increasing numbers of fatal wolf attacks.  I’m certainly not positing an inverse causal correlation between corn prices and wolf attacks (at least in the absence of additional observational evidence confirming the trend, for example, a government decision to harvest wolves to process their carcasses into biodiesel, which presumably would lead both to fewer attacks on humans and lower grain prices) but it does make you wonder about some of the deeper connections between things. 

As the Discovery Channel says, the world is just awesome. - DN

D) Daniel A. Sumner, “Recent Commodity Price Movements in Historical Perspective”, American Journal of Agricultural Economics (2009), 3.