Headline, above the fold article in today’s Wall Street Journal is “Farm Belt Bounces Back“. I settled into read the article, expecting to get at least a skeletal explanation for how the Fed’s monetary shenanigans are driving commodities prices up again, much like 2003/04 and 2008. No. The only mention of the impact monetary policies might be having on the prices of agricultural commodities was in passing, that the good times in the Farm Belt may abruptly end if the dollar strengthens.
The article made much of increasing demand from Asia driving the agricultural boom. Nonsense. People don’t increase their intake of food by 25 and 30% in a year, and Asia’s overall population growth is stable.
The driver of the agricultural boom is the Fed’s cheapening of the currency. The United States is the largest exporter of agricultural commodities (corn, wheat, rice, soybeans, cotton, etc.) in the world. Supply and demand metrics for these commodities are relatively stable, year-on-year. There may be the occasional hiccup in supply, such as happened with Russian wheat this year, but generally supply keeps well ahead of demand, with global population growth having moderated and stabilized while crop yields are marching slowly but steadily higher. With a relatively stable supply and demand, there is only one other explanation for the increased prices: The metric by which supply and demand is measured, i.e., the money, has changed in value. There was no mention of such a thing here.
I’ve posted on this sort of thing before, when the Wall Street Journal’s writers pegged an increase in cattle prices to an increased demand for beef. This is similarly nonsensical.
The Journal included a very informative graph, purporting to show the change in commodities demand over the last few years, which in fact shows the rise and fall of the currency:
Look at the first graph, labeled “Rebounding world demand…”. Does it show the total consumption in bushels or barrels as its Y axis? No, it uses money to measure demand. So the graph is actually measuring the value of money, specifically the value of dollars, not the demand for commodities. The demand for commodities can only be accurately measured through measuring the actual physical quantity demanded and consumed.
The Journal makes much of the increase in cotton prices being the result of an increase in cotton demand. Look at the middle chart, and the spike cotton futures from late 2008 at about 40 cents a pound to today’s roughly $1.10 a pound, a nearly 300% increase. Does anyone really believe that cotton demand tripled, or anything like it?
According to the US Dept of Agriculture, cotton prices spiked because India instituted a ban on export in April of this year. But in the same report it showed that cotton demand and supply amongst major cotton importers and exporters was mostly stable. Nothing except money could explain the huge increase in prices. It may be hot money, chasing a momentum trade, or it may just be a currency issue with the dollars. But money, not supply and demand, explains the increased prices.
This is not to say there hasn’t been any increase in demand. With the developing world’s population increasing its consumption of “luxury” goods, like extra sets of clothes, there has been a slow and steady growth in cotton demand. But nothing of the sort to fuel a 300% rise in prices.
So, we are left with this: If even respected business rags like the Wall Street Journal don’t get inflation, how is it possible that the average joe ever will?