Thursday , October 18 2018
Home / Econbrowser - James Hamilton / When Storage Does Not Save One from Low Commodity Prices

When Storage Does Not Save One from Low Commodity Prices

Summary:
When prices are low for a storable commodity, agents (farmers or intermediaries) can wait for higher prices to sell. Of course, there is a carrying cost to storage for many commodities, like soybeans (deterioration of stock, direct storage costs, opportunity cost of capital tied up in commodity). Hence, while storage can mitigate losses, it does not necessarily eliminate economic losses that arise from persistent tariffs. Case in point: From “Giant shipload of soybeans circles off China, victim of trade war with US: Peak Pegasus became unlikely hit on Chinese social media as it tried to beat tariff deadline,” Guardian today: A shipment of soybeans worth more than m (£15.5m) has been bobbing aimlessly in the Pacific Ocean for a month, a casualty of the escalating trade war between

Topics:
Menzie Chinn considers the following as important: , ,

This could be interesting, too:

Menzie Chinn writes N. Dakota “orphan soybeans” at 236 million bushels

Menzie Chinn writes Guest Contribution: “The New NAFTA”

Scott Sumner writes China should raise the price of Big Macs

Menzie Chinn writes You Ain’t Seen Nothing Yet

When prices are low for a storable commodity, agents (farmers or intermediaries) can wait for higher prices to sell. Of course, there is a carrying cost to storage for many commodities, like soybeans (deterioration of stock, direct storage costs, opportunity cost of capital tied up in commodity). Hence, while storage can mitigate losses, it does not necessarily eliminate economic losses that arise from persistent tariffs.

Case in point: From “Giant shipload of soybeans circles off China, victim of trade war with US: Peak Pegasus became unlikely hit on Chinese social media as it tried to beat tariff deadline,” Guardian today:

A shipment of soybeans worth more than $20m (£15.5m) has been bobbing aimlessly in the Pacific Ocean for a month, a casualty of the escalating trade war between China and the US.

The ship, owned by JP Morgan Asset Management, was scheduled to unload about 70,000 tonnes of American soybeans in the Chinese port of Dalian on 6 July, shortly after Trump imposed a first round of tariffs on $34bn-worth of goods.

As it rushed to shore in the hope of clearing customs before Beijing imposed retaliatory tariffs, the ship – and its protein-rich cargo – became an unlikely internet sensation on the Chinese social media platform Weibo.

However, the vessel arrived just too late and has been sailing around in circles ever since while the cargo’s owners, understood to be the agricultural commodity trading house Louis Dreyfus, decide what to do.

Estimated cost/day to charter the ship (so not including other costs) are $12,500, for $400,000 incremental expenditure per day. The ship is idling off China in case the Chinese decide to subsidize imports, thereby rendering the American soybeans competitive again.

In this case, farmers do not lose out. The commodity trading house Louis Dreyfuss (according to journalistic accounts) loses out. But this would seem to be a plain dead weight loss relative to the no-trade-uncertainty case.

And for those farmers holding out for a truce in the US-China trade war, they incur a carrying cost too. If soybean prices do not recover by September-October (soybean harvest season in the northern hemisphere), then they will incur a loss relative to the counter-factual of no tariffs.

While soybean futures for September delivery have recovered somewhat, as of today, they are still 15% below where they were in early March, as Mr. Trump announced Section 232 tariffs.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

Leave a Reply

Your email address will not be published. Required fields are marked *