Paul Krugman wonders why commodity prices are so high:

Broadly speaking, there are three competing views.

The first is that it’s mainly speculation — that investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — that we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.
Krugman attributes most of the run-up in commodities prices over the past few years to rising demand from China, while assigning a small (but he predicts growing) role to dwindling natural resources.

However, while Krugman cited the IMF's 2008 World Economic Outlook (WEO) on his blog for evidence that inventories haven't been increasing, he failed to see the most important finding on commodities in the WEO: that corn-based ethanol production has accounted for a huge share of the high commodities prices. The WEO finds:
Rising biofuel production in the United States and the European Union has boosted demand for corn, rapeseen oil, and other grains an edible oils. Although biofuels still account for only 1.5% of the global liquid fuels supply, they accounted for almost half the increase in the consumption of major food crops in 2006-07, mostly because of corn-based ethanol produced in the United States. Biofuel demand has propelled the prices not only for corn, but also for other grains, meat, poultry, and dairy through cost-push and crop and demand
substitution effects.
Here's a chart from the WEO showing corn production for ethanol as a share of major food crops:

Notice that the share of global demand coming from China and other emerging markets is falling from 2005 to 2008. So it's difficult to attribute the run-up in food prices mostly to China and India. The biggest change in the demand for major food crops has clearly been the huge increase in demand for corn for U.S. ethanol production. Demand for corn-based ethanol began to rise in 2003, and exploded in 2007-2008.

Now look at the commodity price aggregates, and note when the current run-up in prices began:


As you can see, the run-up in commodity prices began around 2003-2004 -- right around the time demand for corn for U.S. ethanol production started to increase. Most analysts acknowledge that U.S. ethanol policies are contributing to the increase in commodities prices, but they seem to assume that the demand for corn-based ethanol production isn't big enough to play a leading role in the high commodities prices. However, the 2008 World Economic Outlook shows that demand for corn-based ethanol production is not only big enough to play a leading role, but actually is playing the leading role.

Ethanol should figure prominently into any discussion of the high commodities prices.

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