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Sunday, April 27, 2008

The Rice Shortage

There's been surprisingly little discussion of the rice shortage on the other blogs I read.

The US government passed a mandate that gasoline must include some ethanol. This drove up the price of corn and the price of ethanol. The "ethanol in gasoline" decision wasn't determined by market forces. The State passed a mandate, subsidizing corn/ethanol producers. Everyone else is paying the cost in the form of higher gasoline prices and higher food prices. It's the usual Distributed Costs and Concentrated Benefits scam.

As oil supplies are exhausted, there may be a point where ethanol becomes economically attractive compared to oil. That point has not yet been reached. State violence is needed to force people to use ethanol.

I read that the ethanol mandate is causing rainforest in Brazil to be destroyed! Due to increased demand for food, it's more economically attractive to clear rainforest and convert it to farmland.

The State distorted the market for food. In response, farmers switched from other crops to corn.

This has caused a shortage of rice.

Further exacerbating the problem, there are price controls on food in various countries. If stores are barred from raising the price of rice, they instead run out of stock. If people see the price of rice doubling in a week, they'll get mad at the store for "price gouging". The the price is unchanged, but if there's no stock, people aren't as offended. Even in the USA, a store that rapidly raises prices may receive negative publicity or a lawsuit.

Many farmers hedge their future production with short futures contracts. When prices rapidly rise, this hedge costs the farmers money. They are faced with margin calls on their short futures hedge. The farmers' expenses are rising, but he's already sold his future crop. A lot of small farmers are being squeezed by rapidly rising prices.

During hyperinflation/stagflation, stores run out of supplies. People with money rush to convert their worthless paper to tangible goods. Stores don't raise prices fast enough to keep pace with inflation, causing shortages.

Also, rumors of a shortage can cause a shortage. If people hear a rumor of a rice shortage, they will go to the store and buy extra rice. This further exacerbates the problem. Stores prefer to run out of stock instead of jacking up prices.

In a truly free market, there *NEVER* are shortages. Prices can rise, but there will never be a completely exhausted supply. In a free market, price changes tend to be continuous instead of abruptly jumping. The current global economic system is *NOT* a free market. Only in a communist economy can there be shortages or rapid price increases.

Instead of blaming the true cause, "The USA does not have a free market", other factors are always blamed for economic problems.

2 comments:

barryb said...

Here ya dude, just more b.s. from politicians who never consider the consequences of their actions. They only look at the 'publicity' they receive when passing such legislation - and of course the media isn't interested in blaming the rice shortages on 'green legislation'. My take on gasoline engines is this. The price of oil/gas has been kept artificially low by our military muscle. I'm sure you are aware that the technology for building cars that run on batteries or hydrogen exist and can be mass produced. But the automobile industry isn't prepared yet to make the switch. Why? Because the price of gas is still cheap enough to keep consumers disinterested in more effecient vehicles. Plus (here's the hard punch) an entire infrastructure has to be built to accomodate these new technologies. And that is not only a lot of money - but a change in our way of life (just a little). So it goes without saying that BIG money rules the roost in America and pretty much everywhere else. By keeping the price of oil low - the oil barrons will continue to make billions. Because once the technology and infrastructure is switched to accomodate batter & hydrogen powered cars - you can say bye bye to oil companies and their profits. And that is why we are still dependent on oil. At least that's my opinion.

Thomas Blair said...

Americans are, in general, pretty stupid:

If you charge more than the other guy, you're gouging.

If you charge less than the other guy, you're predatory.

If you charge equal to the other guy, you're colluding.

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