Mark Thoma's Question
By Arnold Kling
how do you explain the large run up in, say, agricultural commodities which cannot be left “in the ground” until later?
Interesting question. Some off-the-cuff observations.
1. The point about the run-up in other commodities raises questions about any oil-specific story. I suppose one can tell a story that runs from oil to ethanol to agricultural commodities, but that is a bit weak to begin with, and weaker still when one gets to metals, which I believe show similar increases.
2. I disagree with Mark on the storability of agricultural commodities. Wheat can be stored as crackers. Corn can be stored as corn flakes. If speculators drive up the price of corn nine months from now, but there is abundant corn today, my reaction as Kellogg’s is to ramp up corn flake production today, so that I don’t have to rely as much on the expensive corn that is coming in nine months. But that means I buy lots of corn today, which raises the price, just as if I were buying it to store in a silo.
Let me emphasize that I am not saying that high commodity prices are a speculative bubble. Tyler and I tend to think the opposite. I like his term anti-bubble. That is, speculators guessed wrong a year ago, and prices now are catching up to reality.
What I am saying is that speculators do drive the prices of oil and other commodities. Moreover, they do so in the futures markets. Furthermore, there are alternative ways of storing commodities other than grain silos or oil storage tanks, so you can’t rely on those inventory figures as indicators of the presence or absence of speculation.
I should mention that I am not opposed to having speculative markets in commodities. On the contrary, I think that speculators are important in sending signals to commodity producers and consumers.
I have been arguing that the news in oil markets has not been particularly dramatic in the past year. Paul Krugman takes a different view:
Declining Russian production, growing doubts about whether the alleged Saudi excess capacity really exists, etc.. Basically, CERA-type optimism about big new oil supplies coming on line any day now has been fading.
Whether this is “big news” or not is a matter of opinion. I am not going to go to the mat to defend my view.
I would just point out that Thoma’s question raises the bar a bit for the “big news” view. What “big news” has at the same time hit agricultural markets and other commodity markets? It seems to me this nudges things in the direction of monetary surprises or autonomous changes in speculative sentiment.