Matt Nolan

Biofuels and food

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Good article from the Economist on the impact of compulsory biofuel regulations on food prices.

We commented on this a while back.

Biofuel regulations are an undeniable “structural shock” which will lead to “structurally higher” food prices.  What do I mean?  The price of food relative to other things is likely to stay higher than it would have in the absence of biofuel regulations.

Now, I don’t think these regulations are the main driver of the recent price volatility – that would be droughts and economic conditions.  But we can expect the relative price of food products to stay above historical averages.

How far above is a different, and very difficult, question 😉

Update:  Discussion on the issue at Anti-Dismal.

Matt Nolan

Prices and scarcity: Milk

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I see I see, Fonterra and supermarkets have decided to freeze the price of milk.

Now if that is what they want to do, I’m sure they have good reason.  However, lets all remember one thing:  if Fonterra decides to sell milk in NZ more cheaply than it does overseas it is taking a litre of milk that would have been more highly valued by a non-New Zealander and giving it to a New Zealander.

There is no free lunch.  If we were to force Fonterra to do this transfer we are not only transferring funds from farmers to domestic consumers – we are taking away the value that would have been created when Fonterra sold the milk to someone who genuinely values it more highly than the domestic consumer does.

Now Fonterra appears to have done this voluntarily (although who knows what pressure there was in the background), so I am sure there is some sort of … reason.  Still, lets not take this as a indication that price freezes, or closing off from international markets, is a good thing.

Matt Nolan

Pricey food and New Zealand: Net and distributional issues

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I have been crawling closer to writing about food prices for a while.  Originally I was going to only write about distributional issues, but now I’m going to write a little more.

A report released by NZIER yesterday afternoon suggested that New Zealand would be worse off, as a whole, if the relative price of commodities stayed high.  In truth, this result seems like an unlikely counterfactual to me in the current situation (even in the long-term) but the difference would likely stem from some of our implicit assumptions regarding the drivers of higher food prices – and as a result the net income effect and the change in domestic capacity.

However, it is not just people within New Zealand that are concerned, both Matt Yglesias, VoxEU, and the Economist are bemoaning high food prices.  To get an idea of the issues lets split ourselves into three sections:  1) short-term impact of current high food prices, 2) distributional impact of these prices in the short term (this is just for NZ, as it is an important point),  3) long-term impact of high food prices – and what it means if the relative price does stay higher.

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Matt Nolan

Rough 2011 predictions

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I suppose I should make some falsifiable predictions for the year ahead – so I can explain at the end of the year why I was so wrong 😉

Lets go (note, these are my rough picks – they aren’t associated with anyone else, and they definitely don’t exist in a professional capacity) :

  • NZ GDP growth will near 4%pa by the end of the year.  Inventory accumulation will be a major contributor.
  • Consumption growth will be weaker than economic growth – but will accelerate during the second half of the year.
  • NZ unemployment will hold above 5% – but will be in the lower 5’s.
  • The housing market will remain weak.
  • The Reserve Bank will remain dovish on rates over the first half of the year – but then start hiking in June.
  • Farmers paying down debt on the back of high commodity prices, combined with increasing risk taking/confidence by investors, will see interest rates fall over the first half of the year.
  • National and Labour will compete over “savings plans” which will involve far too much in the way of distortions, compulsion, and poor “incentive” programs for my liking.  As a result I will post on them constantly.
  • National will win the election with effectively the same coalition government as we have now.
  • Aggregate commodity prices will peak in March, but will not decline significantly.
  • Oil prices will rise 10-15%.
  • Australian growth will fall slightly below trend.
  • The US recovery will be lower than expectations in the early stages of 2011 on the back of a slight run down in inventories – however, underlying activity will pick up sharply from the middle of the year.
  • The Fed will not lift rates or cut back on QE.
  • Israel will attack Iran to destroy any nuclear capabilities – and nothing will come from it (have put an entire dollar on this on iPredict – with an order to buy another 100 stocks)
  • Chinese growth will slow to 8%.
  • Portugal will teeter, but the essence of the debt crisis will be forgotten again over the year.
  • Japan will tighten policy too early.
  • Subsidies for solar power will become a more common policy around the world.
  • An international mission to Mars will be announced.
  • Update: India will win the Cricket World Cup.
  • Update:  France will win the Rugby World Cup after disappointing in group play.
  • Update:  Gold price will fall – say it will be lower on December 31 2011 than it was in December 31 2010 in US dollar terms
  • Update:  The NZ TWI will be volatile, but on average unchanged!
  • Update 2: Arsenal will win the PL in 2010/11
  • Update 2: LFC will be top of the PL in 2011/12 at Christmas (but will end up coming 4th)
  • Update 2: Wellington Phoenix will come in sixth in the regular season – but will make a semi final.  They will be in fourth place by the end of December 2011.
Matt Nolan

On the competitive devaluations

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I like this post by Menzie Chinn at Econbrowser – primarily because I agree with it 😉  It is well worth a read on its own.

I will however take some bits out for those who don’t want to leave right now:

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Matt Nolan

Financial transactions tax: Don’t forget about incidence

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Economist’s View has again come out in favour of a financial transactions tax.

Now I believe the version of the tax that Mark Thoma supports is different from the one we hear about from the more left wing parties in New Zealand (see here and here and here) – specifically, it is supposed to only be on trade that is seen as ‘high volume speculative financial trade’ … ultimately, it is a more traditional Tobin tax, rather than the tax on all financial transactions that has been raised here.

Even so, I am convinced it is subject to the same criticism – namely that:

  1. the incidence of the tax is likely to fall in unintended places,
  2. there is no reason to think volatility will decline following the introduction of such a tax
  3. there is no reason to think that the likelihood of “exchange rate bubbles” will decline following the tax – in fact by blunting the market price it may increase the likelihood of exchange rate misalignment
  4. there may be practical difficulties with such a tax – eg tax evasion by changing the name of purchases, buy commodities as a proxy for currency etc.

In truth, a financial transactions tax appears to be an indirect means for trying to achieve any goals – while I see why we may want to increase international co-operation/discussion regarding variables that impact on other countries (tax, exchange rate policy, monetary policy) a FTT/Robin Hood tax does not appear to be a silver bullet – or even a useful policy solution.

Update: Patrick Nolan from Reform discusses this in more detail – given that there is a sizable push towards this sort of tax over in the UK.