Food for Thought

Notice something at the gas pump or the grocery store? Even Starbucks? We're theoretically in a time of economic stagnation and even deflation, but somehow, commodity prices keep going up. Since June, for example "various broad commodity indices are up from 15-20%. Few components have not participated in this rally to at least some extent." FinancialSense.com (October 10^th). What's going on? "First, the largest of them all, crude oil. Crude oil and distillates thereof comprise 65% of the Goldman Sachs commodity index (GSCI), reflecting their huge relative volume in the global commodities trade. Have there been supply issues with crude oil recently? No, there haven’t. And in fact, the price of crude oil has not risen by much over the past few months. From a low of around $75/bbl in June it has risen to $85/bbl, a 12% rise, which given the normal volatility of crude is not notable. As the most important industrial commodity, used in all manner of production across the globe, the fact that crude oil prices are not up by much suggests that global economic growth is no longer accelerating.

"Second, let’s turn to the next most important industrial commodities, the base metals, of which aluminum and copper are amongst the most widely traded and are used in a broad range of industrial applications. Since June, both have risen about 20%, somewhat more than the modest rise in crude oil prices. Have there been base metals supply issues? No, there haven’t. So this price behavior is at odds with crude oil and requires further explanation…

"Now let’s turn to agricultural commodities. The prices of grains began to rise sharply in July, when it became clear that the Russian wheat crop was suffering severe damage from widespread wildfires. This past week, grain prices soared again when the US Department of Agriculture (USDA) issued a report indicating the US grain production would disappoint this year. These are clearly supply issues which could be considered mostly if not completely responsible for the rise in grain prices… Sugar, coffee, cocoa and cotton are also widely traded agricultural commodities. In recent months, none of these has been directly affected by supply issues to the extent that grains have. However, of these four, only cocoa has not risen significantly in price. Livestock prices have been mixed, with hogs prices flat and cattle prices rising a modest 5% since June." FinancialSense.com.

For other economists, the answers are not supply-side alone, but the rise in the standard of living of millions of people in what are rapidly developing nations, particularly China, who are driving more new cars than ever before, building and constructing more, and upgrading their diets to more expensive qualities of food, including more meat, fish, poultry and expensive vegetables. Hence, while demand may be falling in the Western world, clearly there are countervailing trends rising in the BRIC countries. That does not augur well for our cost of living, particularly if the dollar tanks in an inflationary inevitability. It does, however, suggest that agribusiness is in for a particularly good ride, if they can reignite their output.

And since the Farm Services Agency (FSA) of the US Department of Agriculture administers the farm loans and subsidies for our nation ($15.4 billion in such subsidies in 2009, excluding the value of crop insurance, etc.), maybe it's time for a ground-up change (pun intended, of course). According to AllGov.com, "The FSA website states that subsidies are received by farmers who qualify in the United States. However, when we look at the actual numbers of who receives how much, we find that only 19 congressional districts (of 435) accounted for half of federal crop subsidies paid between 2003 and 2005. During this same time period, two-thirds of farmers collected no farm bill subsidies at all. The top two percent of beneficiaries received 27 percent of all farm subsidies. The top 6 percent received 52 percent, and the top 15 percent received 75 percent of total subsidies. The bottom 80 percent of beneficiaries shared 16 percent of the benefits of crop subsidies."

The Government Accountability Office has also complained that such subsidies often exceed governmental limits and are even paid to dead folks: "The GAO report said that, in some cases, people who had reached the annual limit on farm subsidies of $360,000 to an individual were able to collect additional money as a beneficiary of an estate… In its response, the Agriculture Department acknowledged that large farming operations, often formed by members of an extended family, could exceed the payment limits by keeping an estate active years after a death… The report follows a 2004 GAO study for Grassley highlighting loopholes in the payment limits. That report found that large farming operations, organized into webs of partnerships and corporations, can legally collect far more than the $360,000 limit. More than two-thirds of the $1.1 billion in payments to estates and companies of dead people went through such entities." Washington Post, July 23, 2007

Hey, I've got an idea! Let's end farm subsidies because American farmers are making so damned much money! We get into trouble with the World Trade Organization and in reciprocal treaty issues (but we're nowhere near how horrifically the government subsidizes farmers in Japan!!!) because of these subsidies, and we really can't afford the luxury anymore. The President has tried repeated to reverse this subsidy, but agricultural states (with two Senators each) have stiffly resisted. Since cutting government is the trend, and since agribusiness isn't hurting anyway, I suspect there has never been a better time to cut farm support subsidies than today.

I'm Peter Dekom, and if we are going to make some sense of our budget, we need to step up and really look where we are subsidizing folks who just don't need the protection!