Food prices, sun spots, drought and who’s gonna make a killing
With corn and other food prices soaring, some firms will for sure make a few good deals. As the drought has spread around, the mighty commodities titans will be there to “sort it out”. Before proceeding to the article below, we suggest reading how Glencore plans making a killing.
With the US experiencing a rerun of the drought “Dust Bowl” days of the 1930s and Russia suffering a similar food crisis that could see Vladimir Putin’s government banning grain exports, the senior economist of the UN’s Food and Agriculture Organisation, Concepcion Calpe, told The Independent: “Private companies like Glencore are playing a game that will make them enormous profits.”
Let’s now turn to some thoughts by John Aziz.
From that sun which is truly ‘of this great world both eye and soul’ we derive our strength and our weakness, our success and our failure, our elation in commercial mania, and our despondency
and ruin in commercial collapse.
W.S. Jevons, 1909
With crop yields falling due to drought, and crop prices breaking out so much that some farmers are feeding their cows discarded candy, perhaps now is a good time to consider the slightly offbeat theories of English economist W.S. Jevons who believed that the business cycle is driven by the 11-year solar cycle:
W.S. Jevons and then his son H. S. Jevons believed that cyclical behaviour of solar activity cause changes in agricultural output and therefore general economic activity. This has been named the “sunspot” theory. Although sometimes regarded as bordering on the bizarre, it is not too farfetched. Non-irrigated agrarian societies obviously would suffer pronounced effects upon agricultural production (and therefore incomes) from climatic alterations. It follows that relative large variations in agricultural production would lead to variations in supporting industries (forward linkages) and then impacts upon industrial output which use raw materials from agriculture (backward linkages) and eventually overall economic activity.
Jevons backed his claims up with data:
Jevons finds that the prices of most agricultural products vary dramatically over an eleven year cycle. He cites English agricultural price data from the years 1259-1400. The prices of wheat, barley, oats, beans, peas, and rye reach a relative minimum in the second year of the cycle, an absolute maximum in the fourth year of the cycle and an absolute minimum in the tenth year of the cycle before recovering in the final year of the cycle and the first year of the new cycle. There does appear to be a rather obvious and consistent trend in prices over these eleven year periods. Jevons finds that the data (English wheat prices from 1595-1761) available to him in the Wealth of Nations (Smith, 1776) confirm similar although less marked trends in agricultural prices.Jevons does not discount other significant factors that might cause the rather predictable nature of these business cycles. Technological advancements, wars, and other factors independent of agricultural and weather cycles can and do exhibit great influence over the economic well being of a nation. Also consumer confidence or a lack thereof could cause significant variations in spending and employment. However, Jevons believes that these consumer attitudes may also be related to the sunspot theory and the corresponding droughts and bumper crops which may result. “If, then the English money market is naturally fitted to swing or roll in periods of ten or eleven years, comparatively slight variations in the goodness of harvests repeated at like intervals would suffice to produce those alterations of depression, activity, excitement and collapse which undoubtedly recur in well-marked succession.”
As Jevons alludes to — and especially in a world where most of us live in an irrigated industrial society — it would seem that there are many other significant factors in determining both long and short term variations in food price — technology shocks, wars, energy shocks, social changes. Food prices are a complex and multi-dimensional equation with a lot of variables.
But the impressive thing is that even in a modern agriculturally mechanised and industrialised economy there remains a discernable underlying association between food prices and the solar cycle:
Some might assume that this relationship is transmitted via precipitation, and that less rain (i.e. more drought) means less food growth, and therefore higher food costs. But this could work the other way, too — too much rain can also damage crops.
And the evidence suggests that more precipitation is associated with higher food inflation, and vice verse:
There is a much looser relationship with temperature:
So while Jevons was correct that there is an underlying association, there is clearly a lot more to it than the solar cycle especially in the irrigated, mechanised, fertilised modern agricultural world. Certainly, it does not seem possible to predict food price changes based solely on the solar cycle, even though it does appear to exert a significant influence.
And certainly — while we can loosely associate food prices with the solar cycle — we have passed through much higher periods of solar activity and drought without such an extreme breakout in corn (or soy) prices:
That chart, more than anything else suggests that the recent corn and soy breakout is terrestrial rather than solar in nature. The chief culprit remains growing ethanol usage:
As well as growing global corn-fed meat consumption: