More On Corn Prices (Updated)

There’s a forum on global food prices going on over at the New York Times that’s helped to expand my understanding of the relationships among ethanol production in the U. S., corn prices, and other food prices I discussed last week. For example, this makes sense to me:

The U.S. is the largest exporter of corn, but we use twice as much corn to produce ethanol as we use it for food export.

Wheat and soy prices increase when corn prices are high, since their acreage allotment is replaced by corn. In addition, wheat and soy get substituted for corn as animal feed.

High corn prices cause higher meat, dairy, wheat and soy prices for consumers. Since last June, the corn price has doubled. Soy and wheat prices are each up 60 percent. Cattle and hog prices have risen 25 percent.

and this makes sense to me, too:

Trade restrictions remain pervasive and help to keep commodity prices high. Recent research by Jeffrey Reimer and Man Li indicates prices could fall by 57 percent if all countries were as open to trade as the United States. Particularly acute examples, like the recent ban of wheat exports by Russia, India’s rice export ban in 2008 and subsequent Philippine hoarding, can greatly exaggerate the effects of weather shocks on world prices. Such policies likely come about from efforts to keep food affordable for a country’s most disadvantaged. Their ultimate effect, however, is to keep food prices higher worldwide, and make more people hungry. To make matters worse, market speculators likely hold greater inventories in anticipation of possible future export bans or hoarding.

As I said last week I’ve opposed agricultural subsidies for nearly 50 years and have opposed ethanol subsidies for corn in particular for as long as we’ve had them. But I also favor aggressive policies to open up world agricultural trade, generally. It’s not entirely clear to me how you disentangle rising prices caused by lousy U. S. energy self-sufficiency policies from rising prices caused by lousy Chinese food self-sufficiency policies.

Let’s consider an example. Unlike beef U. S. pork is, essentially, sold at global commodity prices. Said another way, absent tariff and non-tariff subsidies U. S. pork is competitive with Chineses pork. For much of 2009 and 2010 China had an outright ban on imports of pork from the United States, Mexico, and Canada. There was no ban on imports of grain. Meanwhile, Chinese grain production declined, due to a combination of bad weather and terrible agricultural policy and practices. It may be counter-intuitive but until recently China had been a major exporter of grain, particularly wheat. It is now a net importer.

When corn prices rise high enough rather than feeding their pigs corn, Chinese farmers will feed their pigs wheat and the global price of wheat rises. Bottom line: greater wealth in China, increased meat consumption in China, Chinese agricultural policies, predatory Chinese trade policies, and ill-conceived U. S. ethanol subsidies combine synergistically to raise the cost of food everywhere.

I think there’s an additional message here: when China is the low cost producer of all sorts of agricultural products, industrial materials, and manufactured goods, changes in Chinese policy have a disproportionate effect on world markets and as a consequence of China’s political system such changes can come with alarming rapidity. Fasten your seatbelts, we’re in for a bumpy ride.

See also here.

Update

Moved to action by the absence of actual relevant authorities in the forum I cited above, I went looking for a corn economist and whadday know? I found one and he seems to have direct, relevant expertise. See especially this extremely interesting presentation.