Ag Potpourri - Feb 2017

by Levi Russell

Having recently completed a tour of the state discussing forecasts for Georgia's 4 primary meat commodities, I thought I'd put up some articles on interesting issues looking ahead for 2017.

The guys over at Agricultural Economic Insights have a great post discussing 16 questions for ag in 2017. They have another post on exchange rates which should be interesting given recent GDP and labor numbers, and recent movement in the stock market.

Scott Irwin looks at ethanol profitability for 2017.

Expect a LOT of meat on the market over the next 2 years. The beef, chicken, and pork industries are dealing with massive supplies with no relief in sight.

Finally, anti-trust continues to be a hot-button issue in proteins, most recently on the poultry side. Also, there is potential for the new administration to take action on a controversial new GIPSA rule designed to limit market power among meat processors.

Krugman the Psychologist

In his July 25th column, Paul Krugman attempts to discredit a view he apparently doesn't understand. This time, he focused on Ron Paul, calling him names, comparing him to Bernie Madoff, and suggesting that he is a white supremacist. He claims that the only reason people would believe Ron's analysis is that they too are crotchety racists. Sadly, this is par for the course for Krugman.

When he's done psychologizing, he does manage a bit of substance in the post. He apparently thinks his criticism is utterly devastating to Ron and to Austrian Business Cycle Theory (ABCT). His claim is that, since the CPI hasn't risen due to loose monetary policy, the ABCT is wrong and so is everyone who espouses it.

ABCT has little to say about consumer prices, but a lot to say about asset prices. Though it certainly doesn't apply in all situations, ABCT can explain the dynamics of asset markets in the face of interventionist monetary policy. The 2008 crisis is a textbook example.

When it comes to consumer price inflation, proponents of ABCT have made different predictions at different times. One example is a bet between David Henderson and Bob Murphy. Mish Shedlock is another example of a proponent of ABCT who thought, at one time or another, that deflation was a bigger risk than inflation.

Fed: Rate Hike Will Come Later

On Wednesday, the Federal Reserve convened its regular FOMC meeting to discuss monetary policy and the state of the economy. These meetings are highly anticipated by the finance world, and rightly so. At these meetings, the chair of the Federal Reserve gives her thoughts on the economy and, some hope, an indication as to what interest rate policy will be in the coming months.

This particular meeting was interesting in that expectations for a rate hike had generally been high this year. Earlier this year, many expected a hike in the Federal Funds Rate (FFR) by mid-year. After this meeting, likely very few hold this position. Chair Yellen essentially indicated that a rate hike may come by the end of the year but that upward movement in the FFR target will be slower than originally anticipated.

Yellen has indicated before that monetary policy is "data dependent," so the slower-than-anticipated rate hikes imply that Yellen is not happy with the employment and inflation data/forecasts. The employment aspect of this is especially complicated, since we know that labor force participation has fallen and continues to fall, and many still remain underemployed.

The Atlanta Fed's GDP Now forecast for 2nd quarter GDP has strengthened dramatically since early June. To get anywhere close to the Fed's original annual growth forecast, 2nd, 3rd, and 4th quarter GDP growth is going to have to offset the -0.7% decline in GDP in the 1st quarter. Slow GDP growth also provides justification for low rates.

The Continuing Land Price Decline

A recent article on agrimoney.com summarizes a couple of the causes of the continuing slump in land prices. In this post I'll expand a little bit on the article and discuss some possible scenarios going forward.

As the article indicates, the recent strength in the dollar has put downward pressure on crop prices (and, of course, oil). Part of this is due to an expected decline in exports. As the dollar strengthens, foreign buyers of US commodities will have to pay more in terms of their own currencies to purchase US products. If we expect crop prices to be low, we would expect land prices to fall especially if we expect interest rates to rise (For a full discussion of this issue, see this article.)

Over the last week, the financial press has been abuzz with news of the Fed's removal of the term "patient" from its guidance. The question was whether the Fed would remain "patient" and put off raising its federal funds interest rate target. Since asset prices are an inverse function of interest rates, an indication that rates would rise sooner would probably have pushed down the major stock indices.

Understanding Banking After the Crisis

At his blog Spontaneous Finance, Julien Noizet clarifies some of the basics on banking theory and practice (relevant posts are here, here, here, and here). Since the 2008 financial crisis, the Post-Keynesian and so-called "Modern Monetary Theory" (MMT) camps have gained some traction in debates about how central bank policy affects the banking sector.

Their view is juxtaposed to standard monetary theory, which is based on the money multiplier effect. Though the MMT view is becoming more popular, many of its tenets seem to contradict the basic tenets of smart business. Farmer Hayek readers who are interested in banking theory and practice will likely enjoy Julien's article and the rest of his blog.

Potpourri

- John Tamny, Forbes contributor and senior economic adviser to Toreador Research & Trading has an interesting piece on oil prices with a provocative title: "Let's Be Serious, Falling Oil Prices Are Not Causing The Busts In Texas And North Dakota." His basic point is that the weak dollar has pushed up nominal oil prices over the last several years. This led to a lot of investment in Texas, North Dakota, and other regions. As the dollar has strengthened recently (thanks at least in part on the ending of the Fed's third round of quantitative easing), nominal oil prices plummeted causing a lot of pain for oil investors, employees, and others in oil-rich regions.

He concludes:

The oil patch isn’t suffering cheap oil, rather it’s being wiped out by an unstable dollar.  We’ve seen this movie before as this column has been repeating in annoying fashion since 2005.  Cheap oil isn’t what’s shaking the oil patch simply because the oil in the ground was never expensive to begin with.  It’s the unstable dollar that caused an artificial boom, and it’s that same unstable dollar that’s authoring the bust.  Until the U.S. Treasury gets serious and gifts the U.S. economy with a dollar that is constant in value, the gut-wrenching reversal that’s taking place now in economies reliant on commodities will be the tragic norm.

- Economist Bob Higgs of the Independent Institute discusses the burdens placed on the private sector of the U.S. economy since WWII. Though the market system is robust, Bob correctly points out that there is a limit to the regulatory burdens the private sector can bear.

- On another note, Don Boudreaux shares a snippet of an e-mail from Bob Higgs on what makes a good economist. His comments are similar to those I made in a previous post. One big difference between my post and Bob's email is tone; assistant professors can't afford to be as blunt as Bob is!

- Randall Holcombe of Florida State University provides a graph of new pages in the Federal Register by decade. Note that regulations (as measured by this page number data) are increasing at an increasing rate. He also discusses the recently-proposed Regulatory Freedom Amendment to the Constitution. Put simply, the amendment would allow the Congress to regain its power to decide the regulatory power of the Executive, rather than regulatory bureaucrats deciding the scope and scale of their power.

Potpourri

David Widmar of Purdue University suggests a rising dollar could hurt ag exports in the near future.

Bryan Caplan (George Mason U) has a post about Bob Lawson's (Southern Methodist U) offer of a wager on the relationship between economic freedom and GDP growth over the next 20 years.

Michael Giberson of Texas Tech U defends the practices of "price gouging" during a disaster.

Don Boudreaux says income inequality is just not a big deal.