Monday, February 7, 2011

Debunking Krugman: NYT's "Soaring Food Prices - Blame the Weather"

Krugman is on a roll. Over the weekend, he wrote "Soaring Food Prices - Blame the weather." As I was preparing to post a rebuttal to that poorly written article, another article appeared today which was much better written, "Droughts, Floods and Food." Today's article took into account some of the factors he overlooked in the first article in which he took a very small part of the global grain production story (wheat), region (FSU), and factor (weather) and drew a sweeping conclusion.

Because the media in general fails to see the global food situation clearly and it's been so prominent in the news lately due to Egypt, the subject needed to be covered here. So thanks Paul for explaining it to us, but please allow me to point out a few flaws in your analysis.

Krugman: What’s behind the surge in food prices? The usual suspects have made the usual claims — it’s all about the Fed, or it’s all about speculators. But I’ve been looking at the USDA World supply and demand estimates, and what stands out from the data is mainly that


Kalpa: This is so far off base, Paul Krugman, I hardly know where to start.

I'll begin with the basics. The most important food commodities which determine food security for human consumption are rice, wheat, and corn. To summarize, right now we have comfortable global stocks of rice and wheat, but we are extremely short of corn in the #1 global corn exporting nation because that nation is using well over a third of its corn production to fuel its cars. At the risk of sounding like a broken record, the major commodities causing the FAO food basket price surge are sugar, oils, and corn.

Let's look at rice first, the most important staple for feeding people. Have we had a huge global crop failure in rice production?

Rice is the staple for more than 50% of the world's population and provides 20% of the calories for human populations. It is thinly traded with only 6-7% of production traded on the open market. This compares to 20 percent of wheat traded, 11 percent of corn, and 35 percent of soybeans. Global rice production fell by 2% in 2009/2010 from a record crop the year before.

Although the U.S. produces only 2% of the world's rice, it is the fourth or fifth largest rice exporter. And U.S. ending stocks were up 20% for 2009/2010. All in all, you can see the world is very comfortable in its rice stocks level at the end of 2010.

So as you can see for rice, the most important human food staple, we have not had a huge global crop failure this year.

Global ending rice stocks in 2009/10 were the highest since 2002/03:

Krugman: Wheat production (this time not per capita) is way down.... Part of the answer is that some kinds of demand are growing faster than population — in particular, China is becoming a growing importer of feed to meet the demand for meat.

Kalpa: Paul, I'm so glad you mentioned wheat, since that's the second most important human food globally. It is an important one, too, since it has a higher protein content that either rice or corn.

According to the most recent WASDE report, global 2010/11 wheat consumption is expected to be 1.2 million tons lower while global ending stocks have been raised by 1.3 million tons. The US wheat stocks-to-use ratio is at a high 35.2% (down from 48% in 2009/2010), but the global stocks-to-use ratio is tighter at 26.5% which is near the average this past decade and well below the 22.3% low in 2007/08.

Weather can change the wheat stocks picture quickly, as in any agricultural commodity. With wheat there is a harvest somewhere in the world any given month of the year. Earth to Paul Krugman, weather affecting crop production is nothing new. It's the nature of agriculture.

There have been large wheat purchases by Algeria and Bangladesh lately and Saudi Arabia plans to double its wheat reserves. There is a lot of nervousness related to food inflation in individual nations, resulting unrest, and a spotlight on the Egyptian crisis, the nation which is the largest wheat importer.

All commodities including oil are generally high right now due to increased demand, investment, and a lower dollar value. These factors along with a reduction in wheat stocks compared to a year ago and a multitude of articles predicting a global food crisis have everyone on edge.

Furthermore, some say (not you, Paul) that only price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable during that time period.

Krugman: Why is production down? Most of the decline in world wheat production, and about half of the total decline in grain production, has taken place in the former Soviet Union — mainly Russia, Ukraine, and Kazakhstan. And we know what that’s about: an incredible, unprecedented heat wave.... it sure looks like climate change is a major culprit. And it’s not just the FSU: extreme weather elsewhere, which again is the sort of thing you should expect from climate change, has played a role in bad harvest around the world.

Kalpa: You are right about crop failures due to extreme droughts in Russia and the Ukraine this past year. These areas experienced a 30% reduction in their wheat crops. There were also reduced wheat plantings this past year due to the oversupply the year before. Global wheat production fell 5% from 2009.

This FSU region that you speak of is no stranger to droughts. It is deemed a "risky" agricultural producing region, as they tend to experience droughts two out of every five years.

Some speculate that the Russian region may also be experiencing climate change temperature increases at twice the rate of the rest of the world. Indeed, their temperatures this past summer were cause for alarm and they are perhaps more vulnerable agriculturally to climate change. But, the droughts that they experience on a regular basis make singling out this year as evidence that climate change caused their wheat failure — as well as a huge global harvest failure — is an ambitious overarching conclusion. By no means do I want to dismiss the fears related to global warming's effects upon agricultural production, but most agree that it's too early to know exactly how the multitude of interacting factors will play out.

source: NASA

Krugman: Back to the economics: if you want to know why we’re having a spike in food prices, the data suggest that the key cause is terrible weather leading to bad harvests, especially in the former Soviet Union.

Kalpa: You really scared me with that sentence. If I wrote something like that I'd lose every reader that I have.

Since you like talking economics, besides supply and demand, major causes of high food prices are individual national food policies and currency conditions. The Asian nations are experiencing food inflation because they are experiencing high overall inflation. Poverty levels, subsidizations, tariffs, setting bread or fuel prices, devalued currencies, import and export restrictions, infrastructure standards of food storage and transport are all important factors in food prices which help determine levels of food security within individual nations.

In the past year there were also poor nations which experienced falling food prices and ample food production. This never makes the news. It's way too boring. Also, today we have grain imports happening to take advantage of perceived price opportunity and low bulk shipping rates.

Currently there is more than enough food being produced to feed everyone. The problems come down to supply, storage, distribution, poverty, rapidly growing populations, and waste. Government corruption and failed politics are factors, too.

Finally, we need to address the subject of corn, the third most important food for human consumption. Like rice, you never even mentioned it.

Here in the U.S., the largest corn exporting nation, our stocks-to-use ratio has hit a very low 5.5%, even though our corn production was our third-highest on record. Global corn ending stocks are projected 3.0 million tons lower with more than two-thirds of the reduction coming from the United States. Nearly 40% of our corn crop now goes towards ethanol production.

source: USDA

Our U.S. ethanol policy exists because we had a massive overproduction of corn and consequent low prices. The producers were desperate for some kind of increase in demand. I like to look at it as a corn destroying program, sort of like programs that took place during the Great Depression to help support prices for farmers. With unrealistic established ethanol use mandates and ever growing sales of large pick-up trucks, we have an insatiable dictated demand for food burning in our corn ethanol program.

So you see, we've hardly had a huge global crop failure in corn, either, but we have had a policy failure.

Weather always causes fluctuations in agricultural production. Writing that sentence just made me feel stupid, but I had to when the purpose of this article was to rebut Krugman's weekend writing. We do not know if we are in the middle of another food crisis. We can't yet conclude with certainty how climate change is affecting agricultural production. What we do know is that the good news related to agricultural weather and production is always dismissed while the bad news is always over-dramatized and chosen as the means of predicting the current trend. And that only fuels panic and speculation.