Posted by
Andrews on Tuesday, April 29, 2008 9:13:11 AM
I was reading an
interesting article on the increase in wheat prices. While I will be writing much more about this article soon, there is one thing that struck me.
The article blames the decline in wheat production on a number of factors, the first being the fall in wheat profits:
Across the Red River and farther north, in Euclid, Minn., Don
Strickler, 63, describes wheat as "a necessary evil." Most years, he
explained, farmers lose money on it.
Which would be fine, except that several other times, even as the writing is decrying the losses on wheat, he is describing how expensive wheat has become.
For instance, he opens by mentioning that wheat flour is now more than 50 cents a pound:
Breaking the dollar barrier "scares me," said the Bronx-born owner of
Bethesda Bagels. But with 100-pound bags of North Dakota flour now
above $50 -- more than double what they were a few months ago -- he
sees no alternative to a hefty increase in the price of his signature
product, a bagel made by hand in the back of the store.
And then proceeds to somehow blame strong international trade:
The U.S. government stopped holding large stocks of wheat in the 1980s,
but the United States, nearly alone among wheat producers, allows
countries to shop here even when others have shut off exports.
This free-trade policy resulted in a run on the 2007 U.S. wheat crop
this year by foreign buyers taking advantage of the favorable dollar
exchange rate to stock up, even as Ukraine, Argentina and Kazakhstan
blocked exports.
But after describing strong wheat prices:
Problems started last summer with poor European harvests and a
disappointing winter wheat crop in the southern Great Plains. U.S.
prices moved above $7 a bushel, then crossed $10 after Australia
harvested yet another drought-damaged crop in December.
The author then blames lack of innovation on poor prices (with a token nod to global warming):
U.S. wheat yields per acre have increased little in two decades, partly
because commercial seed companies have all but abandoned investments in
improved varieties, preferring to focus on the more profitable corn and
soybeans. Subtle warming changes in the climate and the recent
availability of new plant varieties that thrive in cold, dry conditions
have pushed the corn belt north and west.
Now, I know economics is not required of journalism majors, but I would think that even a WaPo writer could master the simple concept that if prices are high, there is not a lack of profits. And if foreigners are snapping up US wheat there is not a lack of demand.
As I said, I will be dealing with the entire article later, but for now, let me deal with this silliness. The reason that the author even mentions prices is because he feels the need to write a "factors" story. Journalists always feel better if they can list multiple "factors", it makes them feel they are being balanced and "nuanced". To blame this increase in prices on one cause would be "reductionist".
And, to be honest there are two factors at work here, so he could have still written a "factors" story, had he been content with just two items. But two is not as good as four, so we end up with this silliness about something being too expensive but not turning a profit.
So, why is wheat expensive? Well, I will go into more detail later, but to be brief, wheat prices rose because oil became more expensive, and because of government meddling in the food market, mostly, but not entirely, through ethanol mandates.
It doesn't sound as "balanced" as the WaPo article, but it has the advantage of being accurate.
ADDENDUM
When I said wheat prices rose solely due to oil prices and government intervention, I failed to mention droughts and other transitory factors, and that was intentional.
I do not believe that droughts are becoming more common as the AGW crowd does, so I do not believe any price trends can be blamed on increasing frequency of drought.
There will obviously be short term spikes due to droughts and crop failures, but these will also be largely flattened out by "evil speculators", whose profit seeking tends to level out prices of commodities. (Perhaps I should write on that later as well.) Of course bad droughts will send prices upward, even with speculation, but the current upward trend is not the result of droughts. At the moment droughts may be helping to push the increase, but overall bad weather is a minor factor when compared to fuel prices and, most importantly, our ill-conceived biofuel program (along with changes in subsidies which come along with it).
I just wanted to clarify that before someone accused me of ignoring weather as a "factor".