My story is about a world where…GDP growth yields fewer poor people who respond to higher wheat prices by purchasing less meat or wheat, i.e. we have less of a shock absorber. That generates a reduced elasticity of demand of wheat. So prices have to rise by more in order to clear a supply-demand imbalance than was required in the past when there were more poor people who would adjust.
Here is much more, interesting throughout.
Interesting, but……… I would
add that he misses one reason. The
supply response of stuff like oil,
wheat is low. What this means is
that marginal farm or oilwell sets
prices. When wheat capacity is 100
in the world and demand is is 85
then prices are in equilibrium till
demand reaches 100 after which supply
fails to keep pace which leads to
rapid increases in price. I believe
this is the only model which can
explain the runaway price movement.
The stuff Ajay Shah is true but in
a long-run kind of way. There is also
a bit of circular logic involved
in his story. His logic is that -
Demand goes up and so do prices but
demand is able to go up because
prices aren’t that important to
consumers. His logic that demand
inelasticity has fallen is in effect
a statistical illusion engendered
by low prices and lag in demand
response.Remember that in the long
run all elasticities are unity.
Thank God for black Americans otherwise we would have ended up with the most war mongery candidate from each party. Evidently the American people are in a mood for war.
I hope that republicans and independents are less racist than Registered Democrats or we are in for a president McCain. AHHHHHHHH!
I fear a train wreck coming.
David on some computers the text overflows to the right (one of my computers at home does this) and so some people manually put in line breaks and with manual breaks the short the line the safer.
On the topic there is pretty good elasticity on the supply side so I do not see this as a great problem. In fact there are some ways that can increase yield per acre but are not used because they cost more that the yield in return. There are also ways to reduce shrinkage. Some are close to being economical and so should come into use with price rises. Also better access to information can help growers respond to prices faster. See Tyler’s story about produces in India a while back.
Also sounds like an opportunity to some creative person.
It’s rubbish. It relies on the debunked Irish potato famine example. There ain’t no Giffen goods.
We are seeing the same thing we saw in the 1970s– a major population group becomes rich enough to eat meat regularly. This leads to greater grain demand. But grain prices are largely a function of stocks. Consequently the increased demand does not impact prices until stocks are drawn down. We are now in that stage of the supply-demand imbalances induced by long leads and lags and it will take time until the world can react to the higher prices with higher supply.
The big difference this time is that the imbalance is more structural and less short run fluctuations. In contrast to the Chinese now, the Soviets normally were able to produce enough grain to fill even higher demand when they started eating meat. But now the Chinese are unable to fill demand domestically and must resort to the world markets– the marginal supply.
Moreover, in the 1970s Nixon-Connelly deliberately took advantage of the temporary increase in demand to cut back domestic grain output to raise prices as a way to pay for higher oil imports. It was a deliberate policy.
Nick, I’d say Spencer is correct. You ignored an important part of his post which is stocks. For example, stocks of certain agricultural items are at their lowest levels in 20 years. World corn stock were about 200 million metric tonnes in 1986, and have now declined to 99 million metric tonnes. Same story with wheat.
China Oil consumption (thousands barrels per day):
1990: 1,990
2006: 7,201
There are also inputs to commodities that are causing problems. There is lots of Copper in Chile, but an electricity shortage is hampering efforts to increase production for this key supplier. Bringing new electricity online does not happen overnight (part of their problem is a drought that has hurt hydro power there).
So the issues right now are declining stocks (inventories) + increasing demand + input issues.
Go here to see agricultural charts for stocks.
http://www.cbot.com/cbot/pub/page/0,3181,204,00.html
Another great site:
http://tonto.eia.doe.gov/country/
If you have to buy some maple mesos, please come to our company.
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