Rising Corn Prices: More than Climate Change

Corn prices over time (indexmundi.com)

Today, I had lunch with my good friend, Mark Maynard. He told me that his father recently tried to blame President Obama for increasing corn prices. Mark responded by pointing out that low precipitation and climate change are the culprits. The press recently has certainly indicated that this year’s drought will have an effect on corn prices and this very well may be true. I do not dispute this.

Mark’s logic, though, is suspect and I perhaps chided him a bit strongly (Mark is kind, though small and fragile). I am pretty positive that Mark’s father’s emails, given what I know of the other emails, are filled with the same conspiratorial nonsense that seems to fly all over the internet. It was Mark’s response, which I did not read, that bothered me, exclusively blaming climate change and weather events for increasing corn prices around the world at the expense of greater, less publicized issues surrounding food prices.

The prices of this year’s corn will have little to do with corn that is being harvested at present. Next year’s prices may certainly be affected, though to what is extent is up to speculation. News reports are predicting a 10% increase.

Certainly, a 10% increase is bad thing. Poor households will pay 10% more for food than they did last year. If we assume that very poor households in the United States have only $2.00 per day to spend on food (according to Joe Stiglitz’s math), this could be devastating for someone trying to feed multiple kids. I am not disputing this.

However, corn prices have been increasing rapidly for several years. This trend cannot be ignored. The figure above shows that the worldwide prices of corn have been increasing since at least 2002, follow the general pattern of the American economy crashing in 2008, then recovering quickly at present. But after decades of mostly flat prices, this giant spike is noteworthy, and, in my opinion frightening.

Important to my discussion with Mark, this trend has little to do with precipitation in the United States (below), which has actually been increasing over time.

Global mean temperatures (NASA)

We note that global mean temperatures have been increasing for at least the last half century, but also note again that corn prices did not rise uniformly with this increase. (The scale of the corn price graph is 1980 to present. During this time, there was a consistent rise in temperature, where corn prices, outside of some bumps are mostly flat until 2002.)

A spike of 10% next year over this year is a problem. Ignoring the overall trend of price increases (raising the base price that we would use to calculate next years price), is wholly unwise particularly when it is due to forces very much within our control.

I have written before on the problem of the trend toward financialization of commodities, the move from volatile equity based investments, to speculation on high yield, high demand commodities such as ag and mineral products, a practice that was illegal before the early 2000’s. Looking at the NASDAQ index, the evidence is compelling. The price of corn follows the stock market, suggesting that the two are tightly connected. Spikes in the price of gas and oil are also connected with this trend.

According to a UN Conference on Trade and Development report

• “these factors (rising food demand, biofuels, climate change) alone are not sufficient to explain recent commodity price developments; another major factor is the financialization of commodity markets. Its importance has increased significantly since about 2004, as reflected in rising volumes of financial investments in commodity derivatives markets – both at exchanges and over the counter (OTC). This phenomenon is a serious concern, because the activities of financial participants tend to drive commodity prices away from levels justified by market fundamentals, with negative effects both on producers and consumers.”-UNCTAD, 2011

The issue is certainly complex, much more complex than merely looking at one’s dying yard and concluding logically that weather is reducing supply which is raising prices. The reality, that American retirement accounts are gambling on the desperation of poor families in developing countries, is far more frightening, though they’ve long (and happily) gambled on war profits and tobacco.

We can do little to fix the weather. We can, though, fix economic policy to encourage equity in the worldwide price of food, a basic human right in my opinion.

Note: I just noticed that the New York Times ran an ariticle today which focuses on the role of weather on food prices, but fails to make even the smallest mention of the issue of the financialization of food commodities.

Rainfall in the US over time (NOAA)

NASDAQ over time

About Pete Larson

Researcher at the University of Michigan Institute for Social Research. Lecturer in the University of Michigan School of Public Health and at the University of Massachusetts Amherst. I do epidemiology, public health, GIS, health disparities and environmental justice. I also do music and weird stuff.

6 responses to “Rising Corn Prices: More than Climate Change”

  1. stumpwater says :

    OK Pete, if you’re going to chide Mark for not presenting a complete picture (on/near his birthday, no less!), I feel obligated to call you out for not mentioning the ethanol mandate for gasoline sold in the US. We use roughly half of all domestically grown corn to fuel our vehicles. Financialization of commodities may be the most pernicious factor here, but certainly the ridiculous ethanol mandate can’t be ignored. The true cost, by the way, is in arable land. We really should only grow corn on land that isn’t suitable for anything else, since it yeilds very little nutritional value per calorie and per hectare relative to alternative crops.

  2. stumpwater says :

    Uh, I meant to say roughly 40%, not “roughly half. . .” I got a little carried away.

  3. Pete Larson says :

    You, like Mark, are approaching the issue of rising corn prices as a wholly a supply issue. Yes, supply and demand factors influence the price of corn on the world market. They don’t however, explain the rapidly rising and volatile trends we’ve seen since the beginning of the 2000’s.

    Yes, ethanol demands corn, but corn production has nearly doubled since 2003 while demand for energy in the US has slowly declined. While we may be dedicating more corn to the production of biofuels, we’re producing more of it. We might see some increase in corn pricing, but it shouldn’t be volatile (given the past stability of corn prices), nor rising to the extremes that we’ve witnessed over the past few years.

    The UNCTAD paper I referenced also debunked the role of biofuels in present day corn pricing.

    It is a fact that food has been financialized. The point of this and my previous post is to point out that, since financial markets do not operate as standard supply and demand markets but rather depend upon gambling on potential outcomes of profit and loss, the price of corn has been distorted. It is easy to see that corn prices are following the pattern on the stock market generally.

    Of course, one can argue that the financialized nature of energy is creating this distortion, but, again, restrictions on commodity financialization were also lifted on petroleum products along with food.

    If corn prices were simply determinedby supply and demand factors, we might see small spikes and dips, but no rapid trend. Here, we see rapid increases and violent dips, following the path of traded stocks.

    That corn (and all food) is now subject to the overall health of the financial market is a frightening prospect. It is immoral to wager hedge funds and retirement accounts on the price of food for the poor.

  4. stumpwater says :

    “Of course, one can argue that the financialized nature of energy is creating this distortion, but, again, restrictions on commodity financialization were also lifted on petroleum products along with food.”

    Yes! I agree that financialization of food is the most pernicious factor — it’s just that linking food and petroleum (via the mandate) makes food even more inextricable from the intrinsically more volatile oil markets. On the other hand, thermodynamically speaking, all commodities are either energy, or materials necessary for the extraction of energy (ores necessary for energy-extraction infrastructure). If there is to be a securities market, then it’s not at all odd for food to be a part of it. But I understand that the point you are making is in regard to humanitarian issues, and I agree with your implied assertion that the markets are a wealth-extraction instrument, and that allowing food to be used in such a manner is an ethical failure (at least, that’s the implication I get from your post, anyway).

    Also, thanks for helping me think about this more clearly. It’s hard to get outside the 9th grade economics BS parameters we were all programmed with at young tender ages. Not to mention the fact that the markets are vastly different creatures now than they were way back when I was being indoctrinated.

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