The Twists and Turns of Public Policy

NY Times has a business article saying that commodity index firms are investing more money in commodity futures, perhaps leading to more volatility. Meanwhile, Tom Friedman reports in his op-ed that his daffodils bloomed in January (mine didn't) and voices a call for a Green New Deal. And the Times world news has an article whose lede (first time I've used that term--gosh, I feel all knowledgeable and hip) is:

"Facing public outrage over the soaring price of tortillas, President Felipe Calderón abandoned his free-trade principles on Thursday and forced producers to sign an agreement fixing prices for corn products."

We liberals want to fight global warming, so we encourage ethanol production, particularly when we're seeking the Presidency and it's primary time in Iowa. But on other days we also complain about farm programs, as undeserved rewards to big industrial agribusiness. Those of us focused on foreign lands worry about the impacts of cheap US corn on poor Mexican peasant farmers, observing that if they can't be kept on the farm, they'll end up in the US.

But that's last years politics. Now it seems that demand for ethanol, sparked by high oil prices and government supports, has taken off at the same time the uncounted millions of Chinese have earned enough money to start eating meat, good corn-fed meat, sending corn prices high. (Soybeans are up too, but not as high.) So high corn prices are bad for the Mexican poor, who need protection. (Not sure if high corn prices will drive the urban worker to the U.S, but it won't help the evolution of democracy in Mexico.) Of course, capping the corn price in Mexico hurts those farmers remaining on the land.

Meanwhile, the volatility of corn prices resulting from the market dynamics (demand is relatively inelastic--it takes lots of meat eating Chinese and new ethanol plants to move the price) may be accentuated by boomer money flowing into index funds that seek the next hot commodity (gold and copper have had their runs, now it's time for ag commodities).

What's missed here is the relationship of farm programs and volatility. Farm commodities are much more volatile than other commodities (just watch your California navel oranges go up in price). Over the years, that uncertainty has led to the creation of programs to lessen risk, which continues even now.