Monday, April 21, 2008

Revisiting the Corn Laws 2008 Version

The rise in the price of rice has caused rioting and governments are reacting. As I've said, these government interventions will just make the problem worse. Steve Hanke likens the current interventions to the Corn Laws:

Now that governments in the rice-consuming countries have hit the panic button, we are witnessing a stampede to introduce more interventionist measures, discredited central planning solutions and more government-to-government trade deals.

This amounts to trying to deal with the problems created by massive government- created market distortions in the rice trade by throwing in some more distortions. This will, no doubt, simply magnify our current rice problems.

Rice laws and regulations are going in the wrong direction. It takes one back to the British Corn Laws. These mandated the virtually complete government regulation of British agriculture at the start of the nineteenth century.

Fortunately, that yoke was removed in 1846. Thanks to the efforts of Richard Cobden, John Bright and the Anti-Corn Law League, the Corn Laws were repealed. This resulted in the promotion of free trade, the importation of cheap food and a major surge in British standards of living.

What rice needs today isn't more government meddling but a modern version of the Anti-Corn Law League.

The first part of this article explains well why prices are high. It has much more to do with interest rates than ethanol production or any of the other dubious explanations I've seen:

The economics of commodity markets provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the "convenience yield".

The convenience yield is driven by the precautionary demand for the storage. When the convenience yield is zero, a market is in "full carry", future prices exceed spot prices and inventories are abundant.

Alternatively, when the precautionary demand for a commodity is high, spot prices are strong and exceed future prices, and inventories are unusually low.

As the term structure of rice prices makes clear (see chart), the precautionary demand in Thailand is not elevated and inventories are ample. Indeed, for the term structure of prices to be signaling unusually low inventories, the term structure would be negative in slope, not positive.

Commodity prices are rising because of monetary policy and no amount of government intervention will change that. The only governemnt policy that will solve this problem in the long run is to stop the original government intervention - in the money markets.

No comments: