An Answer?

I asked a question at the end of this post. Arnold Kling answers:

Mark Thoma's Question, by Arnold Kling: He asks,

how do you explain the large run up in, say, agricultural commodities which cannot be left "in the ground" until later?

Interesting question. Some off-the-cuff observations.

1. The point about the run-up in other commodities raises questions about any oil-specific story. ...

2. I disagree with Mark on the storability of agricultural commodities. Wheat can be stored as crackers. Corn can be stored as corn flakes. If speculators drive up the price of corn nine months from now, but there is abundant corn today, my reaction as Kellogg's is to ramp up corn flake production today, so that I don't have to rely as much on the expensive corn that is coming in nine months. But that means I buy lots of corn today, which raises the price, just as if I were buying it to store in a silo.

Let me emphasize that I am not saying that high commodity prices are a speculative bubble. Tyler and I tend to think the opposite. I like his term anti-bubble. That is, speculators guessed wrong a year ago, and prices now are catching up to reality.

What I am saying is that speculators do drive the prices of oil and other commodities. Moreover, they do so in the futures markets. Furthermore, there are alternative ways of storing commodities other than grain silos or oil storage tanks, so you can't rely on those inventory figures as indicators of the presence or absence of speculation.

I should mention that I am not opposed to having speculative markets in commodities. On the contrary...

I have been arguing that the news in oil markets has not been particularly dramatic in the past year. Paul Krugman takes a different view:

Declining Russian production, growing doubts about whether the alleged Saudi excess capacity really exists, etc.. Basically, CERA-type optimism about big new oil supplies coming on line any day now has been fading.

Whether this is "big news" or not is a matter of opinion. I am not going to go to the mat to defend my view.

I would just point out that Thoma's question raises the bar a bit for the "big news" view. What "big news" has at the same time hit agricultural markets and other commodity markets? It seems to me this nudges things in the direction of monetary surprises or autonomous changes in speculative sentiment.

A quick reaction: I don't think I'd like year old crackers or cereal very much.

On the storage question, Krugman looked at stocks of grains and other commodities back in April when he first began making this point (e.g., see his graphs for oil and metals):

The USDA data (big pdf) show stocks of wheat and other grains declining in recent years.

The link shows the data on stocks for wheat, but it isn't in graphical form. So here's a bit more on grain stocks:

Wheat

Feed Grains

Rice

World Grain and Oilseed

The question I have for Arnold's story is that while it may be possible to store grains and other commodities in non-traditional forms, if the claim is that's what's gong on now, why store grains in (what I presume are) more costly non-traditional methods when, with stocks this low, there is plenty of storage space available?

On the "big news" point, I agree that the "big news" story is hard to apply across the commodity groupings, but I don't think we are only left with the two possibilities he cites as explanations.