David R. Kotok
August 11, 2012


Two expert agricultural economists joined this year’s gathering in Maine. Their expertise is worldwide. Each of them has years of experience forecasting various ag scenarios and resulting global impacts. One is chief economist of a major, worldwide trading company; the other is affiliated with a bank that is involved in agricultural lending.

We discussed corn, soybeans, and drought effects on world prices. We examined emerging economies, where food is a large component of the price index. We talked about how food spending drives the political constituencies in those countries. Bottom line: the geopolitical risk premium rises as food prices consume increasing amounts of household budgets.

The biggest take-away for me was the explanation that this decline in food production is likely to be a multi-year cycle. And this is not just one in one drought-stricken region of the world. The impact of food price increases is now global. Moreover, we have run down the inventory cushions.

Weather-induced price hikes are an exogenous shock, meaning that they are caused by factors from outside the system. Central bank monetary policy can do nothing about an outside shock. Central banks cannot grow corn. At a zero-bound policy interest rate, all the central bank can do is watch the price index climb above its targets. Any action it takes is likely to be counterproductive.

Governments often use fiscal policy to deal with food issues. Politicians act because they feel the heat from hungry constituents. In some cases, they implement food price controls that end up exacerbating shortages. In other cases there is turmoil in the streets, and it may lead to regime change, or at least the threat of regime change. But fiscal policy is constrained by large deficits in most OECD mature economies. Agree or not, we already see it being used as a subsidy in developing countries. The outcomes of fiscal response are questionable since they amount to a forced transfers payment.

The bottom line for me is to take this food price shock seriously. It flows beyond grain itself and into animal and energy feed stocks. It affects the rearing of the four-legged critters and the ubiquitous poultry found around the world.

Household budgets are impacted at many levels. That causes consumer retrenchment in other spending streams. This developing food price spike piles on top of the energy shock that is also underway.

In response, Cumberland Advisors is maintaining a cash reserve in our US ETF accounts. We have ratcheted back our exposure to the consumer discretionary sector. We expect food and energy costs to negatively impact household budgets in the mature economies of the world. In the frontier and emerging and developing nations, we expect food and energy costs to restrict household budgets severely.

A personal note: I recall conversations several years ago with the chief economist of the Central Bank of Zambia. I met with him while planning the Global Interdependence Center conference at Victoria Falls in Livingstone. A number of sub-Saharan African nations participated in that conference.

He described to me how the economy of his country was maize-based. He said, “Here I am trying to advise the governor of my central bank about what interest rate he should use for monetary policy. Half of my price index is being driven by rising corn prices.” At the time, Washington’s ethanol subsidy policy was creating those rising corn prices. He looked at me hard and said, “What would you do if you had to advise my governor on central bank policy?” The question had no clear answer, and left both of us perplexed.

Today we confront a similar but even more extreme issue. Ethanol mandates still exist, although a political attack on them is gaining momentum in Washington. The outright subsidies stopped after billions were wasted by our Congress and presidents (Bush and Obama), but the mandate continues. Washington is still causing corn to burn in automobiles. Meanwhile, Washington’s politicians starve hundreds of millions of people in the developing world.

Dear reader, this makes no sense and never has to this writer. But the reason the destructive policy persists is clear to me. Our American political system is corrupted by money, including contributions to politicians who put themselves ahead of most constituents and ahead of the lives of people around the world.

The shock this time is not due to an extreme subsidy. Yes, the subsidy is still there in the mandate. But this time the shock is weather, and nobody can control the weather. We may debate if it is anthropogenic but, alas, we cannot control it.

We may have only begun to experience the food price shocks and to see the steeper prices flow through to the entire food apparatus. Some models that we discussed in Maine indicate that corn could exceed $10 a bushel in a spike.


David R. Kotok, Chairman and Chief Investment Officer

Category: Commodities, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Corn”

  1. ilsm says:

    Going back to the late 1970′s. Selling wheat and corn to the soviets in the 80′s…………………….

  2. Moss says:

    Our American political system is corrupted by money, including contributions to politicians who put themselves ahead of most constituents and ahead of the lives of people around the world.

    This statement is true but one needs to ask who is contributing to the corruption? The whole system is corrupt not just the political aspect.

  3. The greatest danger in global climate change may not be a overall rise in temperatures (though that’s plenty bad enough)…

    But rather increased volatility.

    In other words a 1 degree ‘general’ increase in temperature may be very manageable for any particular locale…

    But it doesn’t take much increase in the ‘range’ of a variable to make an area completely unusable.

    Let’s take an area that has an average daytime temperature of say 70… which moves to 71.

    Well the BIG question is “do the extremes change?”

    To make the extreme case … a location that is 70 degrees every day of the year… versus one that is 0 degrees half the year and 140 degrees the other half.

    Both have an average pleasant temperature of 70… but one of them is an unlivable nightmare.

    Is this occurring? Is this kind of volatility possible? I guess we’ll find out.

  4. Michael says:

    I find it most interesting that is against Federal Law to import ethanol. Brazil can create ethanol from their sugar surplus at a fraction of the cost of our corn based production, even with transportation.

    The Island of Barbados has to subsidize their sugar production each and every year. Ethanol production would help this island be more economical vital.

    We have ways to free up corn in the world supply and not taker ethanol out of gasoline. The only thing stopping us is political will and our politicians turning their backs on well funded lobby groups.

  5. [...] Barry Ritholtz at the Big Picture on the mounting geopolitical risks due to rising food prices. [...]

  6. “…“What would you do if you had to advise my governor on central bank policy?” The question had no clear answer, and left both of us perplexed…”

    Mr. Kotok,

    if you, Seriously, believe the above ‘snip’..

    I suggest to you that that you may care to understand, more, of the following..

    really, Diversity can be a Strength.

    whether found in ‘Energy Supply’, ‘Network Redundancy(-ies)’ (Internet), or, simply, ‘More than “One Good Idea”..’ …

    Distributed Systems allow for greater resiliences, more Independence..

    “Interdependence” can create Monocultures–beyond, mere, Thoughts/Ideas..

    as always, We should be circumspect, before Interring Independence..

  7. ConscienceofaConservative says:

    Converting corn to ethanol with tax payer dollars is just bad economic policy. Ethanol is inefficient as a fuel source, reduces the life span of cars , and results in higher food prices, not just for corn but for animals that consume it as well.

  8. olddogDALTX says:

    David, you have regressed to a position I held erroneously while a physics grad student in the seventies and for decades thereafter. Since then, I have realized that unless the US taxpayer wants to pay farmers to grow ‘maize’ and ship it to Zambia (Just try that!), the dots simply aren’t connected. Corn starch to ethanol is an interim technology, a necessary step, and it will ultimately fade into non-existence as we move toward sustainability. There are myriad technologies in the kiln that will render corn starch to ethanol an inefficient and expensive relic of history. The real problem is not, nor has it ever been the RFS, but the lack of international cooperative mechanisms to provide global security, while protecting the right of polities everywhere to self-expression. These mechanisms are evolving, some in stealth and others openly. In the mean time there will sadly be dislocations as there have always been. One can hope and I believe that the severity of the crises will diminish with time.

  9. CentralIowaFarmer says:

    Someone should tell California that it is ILLEGAL to import ethanol into the United States (

    Try and read this article down to the bottom, where it states “Blenders have “significant structural impediments” against switching away from ethanol, including industry requirements for octane and oxygenates for which ethanol remains the least expensive source. Futures prices for corn, ethanol and gasoline also “suggest that blending will remain profitable well into the future,” they said.” ( Ethanol is profitable, which is why it is still going gangbusters, even though the tax credits/subsidies have been eliminated since January 2012. Ethanol is cheaper than any other product to maintain octane levels.

    The US currently ships half of the soybeans in this country to China. Once every 10-20-30 years, the country (and the world) will suffer from the effects of a drought. Sorry to everyone that thinks food prices should be fixed by the government. I sold a percentage of my corn crop (real hedging, to those who care) at around $5, and will be lucky to grow enough to fill those contracts. If we had 80% of normal rainfall across US, corn would be $4 or less. Ethanol had a little help to get started, and it is slowly going away. 2/3rds of the corn going into an ethanol plant goes out the back end as food for cattle, pigs, and chickens.


  10. CentralIowaFarmer says:

    As David Kotok points out, the extreme this year is the weather. I suppose that the US could possibly reduce the impact of a drought by improving our infrastructure and capturing more mountain runoff via locks and dams and reservoirs, as well as perhaps developing wells and irrigation systems across US. This may be in our future if global warming actually does change our weather patterns. Remember that Iowa was once an ocean, and was also covered by glaciers. Some farmers in Nebraska and Kansas already farm large tracts of land via irrigation. It can be done, but at this point, markets and weather are normal enough to not call for such drastic action. Compare the price of corn and price of a gallon of gas, tracked for inflation. Food is still cheap in US. China pays a lot more for US corn and soybeans (as well as S. America soya), especially after shipping is included.