The real price of rice

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Here’s a typical story on rice prices:

Experts say rice prices are rising because of a mix of irrational panic, weather problems – typhoons in the Philippines, a cyclone in Bangladesh, flooding in Indonesia and Vietnam – and an overall reduction in the amount of land dedicated to rice farming. There are also strong suspicions of hoarding, something that the Thai commerce minister recently encouraged before reversing himself.

And here’s a story from Steve H. Hanke and David Ranson:

The most recent rice price spike is partially the result of countries such as India and Egypt imposing restrictions and bans on exports, plus the desire of other governments including the Philippines, the world’s largest rice importer, to bulk up their stockpiles. But the blame for the long-term trend of higher prices should be placed upon those who’ve delivered a weak U.S. dollar…

But determining what’s behind the escalation in commodity prices involves a principle to which economists universally pay lip service but in practice often ignore or forget: the distinction between nominal prices and relative (real) prices. Nominal prices of commodities are determined by the value of the currency used to stipulate them, while relative prices of commodities are determined by supply and demand — scarcity, glut and other “real” causative factors…

Officials should stop wringing their hands over sky-high rice prices caused by alleged changes in rice’s supply-demand fundamentals, and politicians should refrain from pointing accusative fingers at speculators and hoarders. The rice-price problem is a weak dollar problem. Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated.

The claim that the rice-price problem is a weak dollar problem implies that (1) buyers of rice using other currencies should be unaffected and (2) the price of rice relative to other imports should be unchanged for US consumers.

Here’s Thai rice, up 140% over the last year:

And here’s the dollar-baht exchange rate over the last year:

Looks like Thai rice exporters are enjoying an increase in real income (and Thai rice importers a real decline).

Moreover, domestic prices are up:

And it is not just the international market that is in crisis. From October, 2007, to March, 2008, domestic rice prices increased by 38 percent in Bangladesh, 18 percent in India, and more than
30 percent in the Philippines.

This isn’t just a nominal illusion.

Next, Hanke and Ranson offer some chart about gold prices that’s difficult to interpret:

Since none of my friends earn their income in gold, I have no idea why this matters. The nominal price of rice and gas are up over the last few months; the nominal prices of other imports (such as my holiday in Ibiza) are also a bit expensive, but their prices haven’t risen nearly as fast. When you divide one nominal price by another, you get a relative (real) price. And look, the real price of rice is up over the last year!

To see that this isn’t a dollar problem, look at the graph provided by Asia Times‘ anonymous columnist “Spengler,” who argues the opposite of Hanke and Ranson but is also wrong:

There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar…

The chart below shows the price of 100 pounds of rice against the euro’s parity against the US dollar during the past 12 months. The regression fit is 90%. There is an even tighter relationship between the price of rice and the price of oil, another store of value against dollar depreciation.

As the chart makes clear, the ascent of the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable.

Allow me to try my hand at disputing. Take a look at the left vertical axis. The dollar price of rice more than doubled over the last year. Check out the right vertical axis. The euro rose at most 20% against the dollar (and you inverted the axis label, oops). The price of rice in euros is up quite a bit, r-squared be damned. Find me a currency that has doubled against the dollar in the last year.

I suspect that the correlations mentioned by Hanke and Ranson are equally meaningless:

For example, during the long period of the dollar’s strength, from the end of 1979 to the end of 2001, gold suffered a cumulative decline of 40%, while rice experienced a cumulative decline of 52%. During the subsequent six years from the end of 2001 to the end of 2007, the price of gold rose 191% and the price of rice rose 127%.

Goldbugs can eat more rice then. But this doesn’t explain the (real) crisis in rice.

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