Water as a binding constraint for agriculture

 source:  

The State of the World’s Land and Water Resources for     Food land    Agriculture

Hubert George, Parvis Koohafkan and Yuji Niino

Session 5: The Future of I&D Design and Development

Water is the binding constraint on agriculture supply. While there have been natural disasters from extreme weather events which have shocks agriculture prices, the longest lasting and most important problem in agriculture over the last few years have been the lack of water. Drought has been the major cause of supply shocks over the last decade. This proclamation is generally not a bold statement because weather has always been a binding constraint, but if there is any shortfall in irrigation and there is lower inventory to use numbers, water will serve as a more important driver in price.

The graph shows the amount of cropland per person is falling and the amount that needs to be irrigated is increasing. This means that if there is no fresh water, supply will be curtailed.  The land coming out of production in the US is mainly in the major farm belt. Land that is used on the margin to add supply is at the extremes in rainfalls so water is all the more important.

No ECB rate cut but Monetary Outright Transactions - good news?

The ECB kept rates steady at 75 bps even though many were expecting a 25 bp cut in the benchmark rate. This is a different policy from the stance taken by the Fed which moved to a zero rate. It is good news for the Euro which should gain or stay steady in response to the unchanged rates. 

The more interesting part of this no action is that it signals that the ECB will focus on the sovereign debt problem with their new Monetary Outright Transactions program. The purchases will be sterilized and without seniority relative to other bondholders. There will not be the same collateral requirements of the past. The objective is to use the buying power of the ECB to by risky debt and sell riskless or less risky debt. You want to spin straw into gold by increasing the demand for bad assets in an effort to make them less bad by lowering the risk premium. The whole idea of having higher rates is to ration the supply of debt and stop poor credits from borrowing. That will not happen with this program. There is no provision of providing liquidity and asking for collateral to protect the central bank. 

Is this different? yes. Is this supposed to be the action of the central bank within their traditional role as the lender of last resort? I don't think so.

Reading Bernanke at Jackson Hole

Bernanke stated that stagnation in labor markets is "grave concern" and additional support will come "as needed". The costs of nontraditional policies "appear manageable". However, a close read of the speech suggests that Bernanke is weighing costs and benefits and that he is aware that costs of further nontraditional policy moves are not trivial.

The speech was called "Monetary policy since the onset of the crisis". It provided a good review of the policy actions of the Fed, but it was a biased view from the architect of those policies. LSAP (Large Scale Asset Purchases) did have the effect of lowering rates, but the impact on labor markets has still been muted. Labor markets may not respond to lower rates.

Bernanke provided a good review of the costs of a LSAP program. The Fed does not have to face these costs yet but they are real and the LSAP program of yesterday will be the LSAS (Large Scale Asset Sale) program of tomorrow.

what is missing is that the LSAP have lowered rates and put more money in the economy, but the amount of excess reserves held by banks is huge by historical standards. The money is not being criculated to credit economic growth. Borrowers do not want to borrow and lenders only want to hold Treasuries.

ECB Draghi non-plan for bond sterilization

The ECB bond buying program seems a odd combination of actions to please everyone. It will include unlimited purchases of government sovereign debt. This means that the ECB will backstop the Spanish bond market. However, the ECB will also engage in sterilization so that the same amount of bonds held in portfolio will be sold in the market. So the ECB will buy an unlimited amount of bad bonds and sell off all of the creditworthy bonds. This should push down rates for risky bonds to prices that do not reflect their risk and it will push up yields for safe bonds to levels that do not reflect their safety. You penalize good countries to safer bad country bond markets. There is no price level that is a target so there is no way the market will know what are the intentions of the ECB. How does this help solve the debt crisis in Europe? 

There is a substitution effect across these bond markets, but the actions of ECB is to force convergence of bond markets that should not be at the same risk levels.

What does this mean for the the balance sheet of the ECB? The ECB will now be holding bonds that have bankruptcy risk. Will the member central banks of the ECB bail-out the bank if bad bonds wipes out the capital base of the ECB? Of course, the idea of a capital base for a central bank is odd when there is fiat money system, but that is for another discussion.