Monday, February 28, 2011

Letters to Mom-in-Law

In the middle of February my #1 lake house drinking buddy, mom-in-law, asked what I thought about the EPA and how ethanol affected the prices of corn.  Not one to pass on the opportunity to toot my own horn, here's the transcript of my response.  Don't forget to check out an article from today's Wall Street Journal, OECD Sees Real Demand Driving Commodity Prices.
I have strong feelings about food inflation, namely that the logarithmic growth characteristics in human populations, coupled with the increasing westernization of foreign countries leads to increasing demand against an increasingly small volume of arable land.  Corn, and other foodstuffs (Tyson has a project that converts chicken fat into biofuels), are inflated for two reasons, then:  demand against supply due to land constraints,  and compounded with supply dislocations caused by weather events like fires in Russia, floods in Australia, freezes in Mexico, as well as the disincentive of those without jobs to produce work in exchange for food.

The latter becomes complicated when considering the hardships endured by the unemployed, but there can be no hope of "recovery" while continuing to push those unemployed onto the government's rolls without creating some kind of modern Works Progress Administration.  Knowing that there's a backstop against which people will not starve, what motivation do they have to find work?  This is a major, major issue.  Present news outlets point to food inflation as primarily caused by supply dislocations.  I stridently disagree with this oversimplification.

To me, there exists a causal relationship between inflation in things that cannot be excepted (food, energy) and monetary policy.  As the price of housing accounts for a preponderance of notional value of the American economy, it gets an extra heavy weighting (~37%) in the figures our government likes to quote in the media.  So when they say, "inflation is muted," they're talking equations, and not credit card receipts.

To conclude, while I believe that ethanol adds to the demand for corn, and therefore drives demand and cost, human demand is the force that must be mitigated, and to do so means gaining real world production from those in exchange for the commodity they wish to receive.

Hopefully you realize that the chart was not meant to push you into hording corn or anything else, just that if you guys decide to visit with your farmers in [a southern state], you have strong leverage to request some rent relief ... especially if they're not treating your place like you want them to.