More Wealth Transfer

In the last few days the price of corn has gone up more than 10%.   We can think of that in the same way we’d think of an increase in payroll tax rate without increasing the ceiling on income subject to the tax, and without broadening the base of taxpayers.

This time, though, the “tax” receipts go to a very concentrated group of beneficiaries, most of whom already get preferential treatment.

So how does this increase in the price of corn affect the daily lives of people who get a salary or wages?  Everywhere!

It’s in almost every food they eat, and more so in the less expensive, more basic foods. It’s in every gallon of gas they buy to get to work, and in the packaging for the stuff they buy at Walmart.

Let’s go through a day for the working poor.

Before leaving the house, they are already consuming corn.  Read the label of any bargain cereal box.  High-fructose corn syrup, even in cereal made from wheat. Then drive to work, burning gasoline with corn ethanol added.

At lunch, our very frugal American worker eats the same lunch as their children: the standby PB&J sandwich.  Once again, corn syrup appears in every jar of peanut butter, the jelly,  and even in the bread.  If they have a can of soda with lunch, more high fructose corn syrup.  An energy bar or candy bar in the afternoon?  You guessed it:  More corn syrup.

Drive home, and burn more corn ethanol.  For dinner, if hot dogs and beans are on the menu, you can find ubiquitous corn syrup in both.  If the dogs are on buns, there’s even more high-fructose corn syrup.  In their soda, if that’s what they drink. And if we’re talking about the kids in the budget-minded family, their juice drinks are just loaded with the stuff, assuming they can’t pay the premium for 100% juice.  Let’s look at another classic budget-stretcher — corned beef and cabbage.  I guess you won’ t need to read the label on the corned beef to figure out that it’s pumped full of corn syrup, too.  Finally, if they have house brand ice cream (or any other sweet) for desert, they get another dose of high fructose corn syrup.

By law, 35% of our corn production goes into our gas tanks, no matter how expensive that makes a gallon of gas compared to gasoline refined from oil.  Adding insult to injury, last year a special incentive of $4 billion was borrowed to subsidize even more corn alcohol than the mandated 35%.  It doesn’t stop there.  Cat litter, packaging products, and a number of other consumables also use corn as their basic raw material.

That it hits lower-income people harder is undeniable.  Just try comparing the most expensive and least expensive items at the grocery store in almost any category.  Only the premium item is likely to have real sugar or honey among its ingredients.  And you have to pay the “organic” or “natural” premium if you want peanut butter made from only peanuts and salt.  At twice the price, avoiding high fructose corn syrup is a real luxury.  Unfortunately, that may also mean avoiding Type 2 diabetes is a luxury, too.

Avoiding paying for corn is almost impossible if you eat in America.  Unless you can afford free-range grass fed beef, you’re going to eat hamburgers fed mostly corn in feed lots.  Same with your chicken or pork.

Add it all up, and we spend more on corn than all the other agricultural grain commodities combined, so it’s a big deal when speculation pushes the price up. We can be sure that the demand for corn didn’t increase by a huge percentage since last week, so speculation it is.

Where does that incremental increase in price go?  Certainly a lot of it goes to leveraged speculators who provided the last “push” to higher prices.  How many of those quick trading profits land in untaxed offshore hedge fund accounts?  How many of those additional dollars end up in the hands of already-subsidized farmers?

The other part of this wealth transfer that isn’t as readily apparent is embedded in our current inflation/deflation picture.  Inflation in the price of inexpensive food and gasoline hits the barely-making-it crowd the hardest.   If they are also wage earners in a weakened job market, chances are they aren’t getting a raise, and their employers are steadily pushing up the percentage of their health insurance premium that they pay, along with deductibles and co-pays.  So their wages are deflating, and the things they have to buy are inflating.  Their solitary source of savings, their house, is deflating.  And if they end up defaulting on their mortgage, a very likely buyer is going to be an investor with available credit and investable cash.  More wealth transfer and more concentration higher in the pyramid.

As you consider throwing some money at a commodities ETF, at least stop whining about the lowest levels of our working class “not paying any taxes.”  They pay sales tax, payroll tax, gas tax, etc., and they pay the hidden tax embedded in speculative inflation of soft commodities, on a relative basis, much more than you and I do.

I haven’t done so, but I may invest in soft commodities myself.  I don’t condemn you for doing so, only for thinking that you are righteous and victimized at the same time when you pay taxes that others don’t pay because they are on the bottom couple of rungs of the economic ladder.  They pay, too, and part of what they pay comes to you when you make a profit buying and selling commodities.  Another part of how they pay is when the payroll taxes were spent to give us a break on our capital gains and income tax, but that probably should wait for another day and another post.

hh

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26 Responses to More Wealth Transfer

  1. Bruce B says:

    HH,

    You seem to be harder on the speculators than the policymakers who gave us the ethanol mandate. Last year there were food riots in Mexico because of corn prices (tortillas). You would think a “compassionate” government would correct that injustice and have us put fossils in our gas tank instead of food. There again, the unintended consequences (you might consider them unintended – I suspect they are a polical payoff to corn growers)are causing great damage. Should we empower the people more who gave us the policy?

    Bruce

    • hhill51 says:

      Bruce…
      Color me cynical.
      I believe that corn subsidies, and the ethanol mandate in particular, exist because the Iowa caucus is the first step on the road to the White House.
      Even the “third rail” of social security benefit cuts is less deadly than pissing off the corn farmers. 😉
      hh
      As an aside, are you as stunned as I am over the miraculous ability of Detroit to make fuel-efficient cars? What’s up with that? When I saw the ad for a 305 HP Mustang with a 31 MPG graphic on it, I had to rub my eyes to make sure I wasn’t seeing things. I have to wonder how long they were sitting on these improvements and too slothful and/or bought off by the petrochemical complex to offer it. (Same applies to high performance / high mileage clean burning diesels, which they’ve had for years in Europe.)

    • hhill51 says:

      One other observation… except for a few people that I consider exceptionally bad human beings in the political sphere, none of the policy-makers spend their time complaining about the working Joes and Jills the way the investor/speculator crowd does. Those few are the same ones that say in front of cameras that unemployment insurance keeps people from taking new jobs. They should try living on one fifth of their former income before saying it’s a disincentive to find new work.
      //
      For the speculators, current management income treated as long term capital gains if and when the money gets repatriated is just a travesty. Works out to 3% per year if they wait five years, even though the money is “earned” for service rendered in the current year. As Warren Buffet points out (without even doing the Bahamian dodge) he pays a lower rate than his secretary, and his income isn’t subject to 15.3% payroll tax, to boot.
      \\
      If they could just learn to shut up, or even be grateful for having such a good deal, I wouldn’t mind it nearly so much as the constant caterwauling by the seven figure income crowd.

  2. Jon says:

    Fellow Traveler:

    Bravo. I had no idea you were one of us!

    Ok, ok, I kid, I kid.

    I haven’t thought much about this, but I suppose high corn prices might be a good thing in the long run. It would be similar to the effects of high oil prices. Ween us off the crap. Maybe rib-eyes and weekend drinking binges in Prague should be more expensive.

    As a card carrying pinko, I probably consume less corn than most, so it should be interesting to see how rising prices hit my pocket.

    Jon

  3. Gary Anderson says:

    <>

    Well put, HH. I made a recent comment on another forum: “…the wealthy in our country (yes, we are among them at our house) have, by and large, become a pool of vocal whiners. While most of us decry the demise of the America that we once knew, many of us whine about any attempt to hold us accountable for fixing it.

    I find that sad. ”

    While our household is not part of the 7 figure annual income crowd, we certainly are among the crowd with more assets than needs and with more than adequate income to support us. We also share your view that those on the lower end of the income and asset scale, are not getting the highly publicized “free ride” in America.

  4. Larry says:

    Interesting thoughts. It is definitely possible to be poor and avoid HFCS. You just can’t be poor AND lazy, or poor AND stupid.

    1) Plant a garden
    2) Cook most things from scratch
    3) Ramen noodles
    4) Potatoes
    5) Drink tap water
    6) Beans and brown rice
    7) Eggs are cheaper than meat

    You’re right about meats – you will eat grain fed if you buy the bargain packs. I’m actually pleasantly suprised that the meat prices around here have remained mostly steady. Produce of almost any kind is more expensive than meat. An apple for a kid’s lunch might even be the most expensive item in the bag. How the hell is a poor parent supposed to give their kids a healthy lunch?!?! Once I move soon, planting fruit trees will be at the top of that list above.

    It’s not easy living this way, btw. So I recommend that Howard and all his friends with money practice a bit, and store a few of these things in their basement… just in case things get worse and you guys have to join the rest of us in the real world. :b

    • hhill51 says:

      Your worldview is far too parochial, and doesn’t allow you to see the actual situations for most poor working families. There are very high odds they live in a metropolitan area, and spend up to two or three hours per day on commuting. They may also live in apartment buildings where a garden isn’t an option. Then there’s the climate and growing season to consider.
      \\
      A lot of working families absolutely depend on having two incomes to get by, each with meaningful commutes.
      \\
      Then again, they might live in places where the natural gas deposits have been “frakked”… check this video:

      • Larry says:

        My worldview is parochial?

        Trust me. I know more about poverty than you do. When is the last time you had to wait for a payday to buy groceries? Was I even alive yet?

      • Larry says:

        I gotta say some more here…

        I seems that with your new-found progressivism that you’ve gained some new empathy for the working poor. I know that you weren’t born with money, so you do have some clue of what it’s like to not have money.

        But your characterization of the working poor did NOT strike me as empathetic at all. It struck me as condescending. (MOST of what you say and write strikes me this way.)

        It’s HARD WORK being working poor without being the charicature you’ve provided. I know this from many years of experience. And I’m not unique.

        Let me try to frame this like an economist for you. You are accustomed to your time being worth a LOT of money. So for you to cook your own food from scratch actually makes that food MORE expensive once your valuable time is considered.

        For working poor people, their time is worth far less. Cooking from scratch is WAY cheaper than buying stuff from a box. But it requires more TIME and effort. But since my time is not that expensive, the savings I made from buying ingredients instead of prepared foods is actually worth it.

        Now as I said before, you can’t be poor AND lazy or poor AND stupid in order to live and eat efficiently on a tiny budget. You have to make up that savings by more time and effort. Said working stiff has to figure out what I just explained (not stupid) and put in the extra time and effort required to prepare the food (not lazy).

        It’s HARD WORK. And it’s NOT FUN. And it DOES take practice to get good at it. You used to work ridiculously long hours, right? Well, many poor people do the jobs and commutes you described, and STILL manage to cook dinner from scratch rather than a box when they get home and pack modest lunches rather than buying them.

        You dismissed the garden. Fine. Your dismissal of drinking tap water by showing an example of one of the very few places in America where the tap water is not potable is disingenuous.

        That leaves the rest of my list intact, which you are free to ignore if you like. If you ever end up poor, by all means follow the shallow example you provided and not the smarter one I gave you.

      • Larry says:

        Another trick of the super busy, yet smart working poor is to cook LOTS of cheap, wholesome foods on their day off. Most of us DO have functioning refrigerators (the ones you assume are full of soda). A bonus pack of chicken thighs ($0.97 / lb. at Sam’s) once roasted will keep just fine in the fridge for a whole week.

        Example dinners: top ramen, diced chicken thigh, frozen peas. 10 minutes, no hfcs.

        Wrap potatos in damp paper towel, microwave. Mash with a splash of milk. Chicken thigh, frozen veggie. 10 minutes, no processed anything or hfcs.

        A big batch of beans and rice will keep in the fridge all week too. Add cheap veggies: carrots, onion, celery for added flavor.

        Buy the cheap Ziploc containers. You can throw them away if you have to, but don’t. Reuse them. Nearly any of my cheap dinners can become a lunch. Pack it before bed so you don’t skip it when rushing out the door in the morning.

        I can go on like this for days listing cheap, easy, quick meals that have little or no processed junk or hfcs.

        You have to KNOW how to do it (not stupid) and put forth the time and effort to get it done (not lazy).

      • Conscience of a Conservative says:

        That the government mandates corn in our gas tanks is the biggest insult with regards to the general price level. That it increases fuel prices is factored out of the CPI as a hedonistic adjustment.

        And incidentally the papers have a number of stories today reminiscing about the tortilla riots of a few years ago.

  5. Wes says:

    I don’t think it is all speculation.
    It is more a supply and demand issue.

    Corn yield forecast downgraded

    WATERLOO, Oct 12, 2010 (Waterloo-Cedar Falls Courier – McClatchy-Tribune Information Services via COMTEX) — It’s a good news, bad news type of harvest.

    Northeast Iowa crop experts said on virtually all of the region’s soybeans are out as of Monday. Barring a dramatic shift in the weather — another dry and warm week is expected — fields will be bare in a couple of weeks.

    That’s the good news.

    Unfortunately for growers, there’s a reason why harvest is speeding along besides the early start. When churning through cornfields, combine hoppers statewide aren’t filling up nearly as fast this year.

    The U.S. Department of Agriculture substantially downgraded Iowa’s corn yield estimate on Friday. As of Oct. 1, the statewide forecast is 169 bushels per acre. That’s down 10 bushels from last month and 13 below 2009. Production is forecast at 2.21 billion bushels, down more than 9 percent from last year.

    John J. Thoma, who farms just north of Waterloo near John Deere’s tractor assembly plant, said the variability from field to field and even within the same field is the problem. Thoma said plants suffered from too much rain, nitrogen loss and a hot summer that curtailed the grain fill period.

    “I’ve seen 220 (bushels per acre) on my yield monitor then down to zero. I’ve never seen something like that before in my life without drought conditions,” Thoma said. “I’ve heard about some real good yields, but me personally, yields are down about 30 percent compared to our normal expectations.”

    On the bright side, Thoma said harvest is going so smoothly that 10-hour days are the norm instead of working late into the night. For the most part, corn has dried naturally in the field.

    Thoma said he expects to save about $20,000 in drying expenses, which will soften the production hit.

    “We’ve had gorgeous weather. It’s easier on the guys working for me,” Thoma said.

    The soybean yield forecast of 52 bushels per acre remained unchanged from last month, but up 1 bushel from 2009. Planted and harvested acres in Iowa were lowered by 300,000 each to 9.9 million and 9.85 million, respectively.

    If realized, soybean production would be 512 million bushels, up more than 5 percent from last year, but 15.6 million bushels less than forecast a month ago.

    Brian Lang, Iowa State University Extension crop specialist for Northeast Iowa, said yields are better in the northern part of the state compared to the central and southern areas.

    “Last year every field was coming out with good yields, this year it’s every other,” Lang said. “There’s disappointment with the lower yields.”

    • hhill51 says:

      Hi, Wes….

      Thanks for the reference. I’ll ask you as I asked Tom D, the former soymeal trader; when there are fundamentals that affect supply and demand as the article describes, that moves prices, right? When more than half the trading comes from people who do not use (take delivery) or supply the product, isn’t the additional capital going to exacerbate the fundamental supply/demand price movement? Isn’t that a good working definition of speculation? In the end, a consumer will pay the price, whether it has risen due to supply constraints, speculation, or both. How am I wrong in looking at the increase in price for an essential commodity (applies to oil, too) as an economic force equivalent to a tax? After seeing that it is a “tax” the question is who pays, and how does that affect their household economics and the wider economy.
      hh

      • Wes says:

        I guess you are right to a point as far as the increase in price.

        What about when it is an over supply and traders start shorting?

        That benefits the consumers and is also caused by the speculators.

        IMO, that is why you need traders along with growers.

      • hhill51 says:

        That is also a double-edged sword, because lower prices sent even lower by traders may drive some producers out of business who would not have failed in an undistorted market. That said, I can see the benefit from producers getting more for their crops from exaggerated bull moves in price because they can invest in capital improvements, etc.
        \\
        Most producers tend to hedge themselves through forward sales, however, so I doubt that this year’s corn crop will result in much higher income at the farm level. That is, after all, the reason an agricultural futures market exists — so that some may speculate and others may hedge.
        \\
        I’m looking at this without a moral filter applied, even though it may not seem that way. I’m trying to show where the money comes from (the consumers, especially in the bottom quartiles) and where it goes (the hedge fund managers who jumped in with very high leverage when the Ag Dept. report came out). As you’ll note, I titled the blog post “another wealth transfer,” and that’s what is happening.
        \\
        This 20% pop in prices is almost certainly not adding to the Christmas shopping budget at millions of “Farmer Brown” 200 acre operations. They don’t exist. It is almost certainly going to hit tens of millions of indirect corn consumers in the form of more expensive food, especially at the cheaper end of the grocery spectrum, and, of course, gasoline w/ ethanol. Since working class stiffs tend to live farther out from metro areas, it probably costs more to drive a car to a legal assistant’s job than it does to drive a car to a lawyer’s job in that same office. As a percentage of disposable income, of course, there’s a much larger differential. That’s why I likened this price increase to a market-driven “tax” that acts like an increase on the rate applied to payroll tax. If it increased the cost of capital goods and operating capital, like the effect higher long-term interest rates, then I would say it behaved like an increase in capital gains tax or corporate income tax rates.

      • Tom D says:

        Howard,

        The whole justification for exchanges like the Chicago Board of Trade was 150 years ago and still is to enable producers to “lay off” or spread their risk to speculators. A grower can pick a price where she can make a sufficient and guaranteed profit for the year’s crop and short corn, wheat, or soymeal. If the price goes up the she loses on the short but matches it with a gain in her delivery to the grain elevator.

        So too a grain or soy processor or food maker can lock in a price to avoid part or all of any subsequent cash price gain.

        It’s speculators who make that possible by taking the other side of the trades of growers and processors. There are position limits for speculators to prevent “corners” and there are always equal numbers of contracts long as there are short.

        It’s hard to see how you could exclude speculation or would want to just because prices go up or down more than you personally think is reasonable. Bad economic thinking there. On the other hand, if the government would keep their noses out of it and quit flooding the system with credit, a lot of speculation would be profitless. But I know you love that destructive credit and hate speculators who thrive on it. A Marxian approach might work for a decade or so….

        Tom

      • hhill51 says:

        Tom —

        Failure to read what you’re responding to, I see. Please re-read the comment to which you’re replying. Is it not true that I said the reason commodities exchanges exist is for producers to hedge by selling forward to speculators? How is that different from your attempt to “educate” me about what I already said?
        \\
        The rest, the political rant, is all in your mind. I’m NOT saying the profits are somehow wrong, just that they exist, and how the radical increase in the price of corn behaves like a tax economically, and who pays and who benefits. Do you have a different way of seeing it? Please look at the facts, not what you think is my moral compass.

  6. Cy Berlowitz says:

    53
    The great Way is easy,
    yet people prefer the side paths.
    Be aware when things are out of balance.
    Stay centered within the Tao.

    When rich speculators prosper
    While farmers lose their land;
    when government officials spend money
    on weapons instead of cures;
    when the upper class is extravagant and irresponsible
    while the poor have nowhere to turn-
    all this is robbery and chaos.
    It is not in keeping with the Tao.
    Tao Te Ching (Written aproximately 2500 years ago.

    Cy

  7. Tom D says:

    I started out as a soymeal futures trader, so my viewpoint may differ from that of bond packagers and HF traders. The current markets in grains and soy are largely the effects of the vagaries of world weather, NOT unholy manipulation. Have you not noticed the heavy monsoons in southwest asia, and bad weather at times in Europe and the Americas?

    Food prices can go up in general inflation and usually do, but they can also go up simply becaue of short term shortages of the physical product. This is one of those latter times since we surely do not have general inflation anywhere as a quick glance at a long term quarterly chart of the CRB Index will prove to you. Ask Bernanke if you have doubts.

    TD

    • hhill51 says:

      Tom —
      I really appreciate the fact that you’re chiming in here. I just checked with Bloomberg, and corn is up more than 19% in four days. You’re not the only one who pointed out the lowered Ag Dept. estimates that were released last week.
      \\
      I know you had a “day job” that was actually a pretty intense career, so I’m guessing that you never took deliver of any soymeal. By my way of looking at it, that made you a speculator who helped reinforce supply/demand trends. Correct me if I’m wrong.
      \\
      This leads me to a question: In agriculture commodities trading, what percentage of the trading comes from traders who never take delivery, and what percentage comes from producers and users? If, as I suspect, more than half the action comes from traders who do not use the commodity, am I wrong to call their influence speculative price distortion that amplifies true supply and demand price action? How much of the price movement would you say comes from such traders, and how much from users and suppliers?
      \\
      It’s especially interesting when the pricing discontinuities come from supply interruptions, as in your example, rather than from classic economic allocation of scarce resource to the buyer(s) with the highest marginal utility.

  8. Bruce B says:

    HH,

    We are basically talking the same language, whether the farm subsidies are because of Iowa caucuses or whether they are some other form of payoff, they are still political rewards for a chosen group. That’s basically what our government does. It picks the winners and losers and they do it such that the masses aren’t rewarded and are actually punished. The chosen winners cash out.

    If we are going to salvage the country, somebody is going to have to do difficult things along the way like piss off those approaching social security age and piss off the corn farmers. We don’t have the money anymore (and really haven’t for decades) to be bribing constituencies.

    Bruce

  9. hhill51 says:

    CNBC staff writer Jeff Cox gets the idea:
    http://www.cnbc.com//id/39671437
    *
    Artcle titled “Corn: Burden to Consumers, But Big Boon For Investors”

  10. Tom D says:

    Howard wrote: “I haven’t done so, but I may invest in soft commodities myself. I don’t condemn you for doing so, only for thinking that you are righteous and victimized at the same time when you pay taxes that others don’t pay because they are on the bottom couple of rungs of the economic ladder. They pay, too, and part of what they pay comes to you when you make a profit buying and selling commodities.”

    You are forgtting that the lowest 40% of US income tax payers don’t pay tax. You are forgetting all the welfare payments and food stamps and rental support and two years of unemployment checks paid by employers and taxpayers. Doubtless I’m leaving out lots of other “safety net” supports for the disadvantaged.

    Should we go communist too so that grain rices don’t fluctuate? Did you really study economics or just math “models” of economics? I’m truly shocked by your current views and apparent ignorance. Sorry, Howard, but I have to say it. But let’s still be neighbors, let’s be friends. Of course you may just be putting us all on…..:))))

    Tom D

    • hhill51 says:

      Tom….
      When are you and others who argue as you do admit that income tax is a smaller revenue stream than payroll tax? You seem to ignore that fact because it doesn’t support your bias in favor of Laffer and Friedman’s BS. Have you anything to say about the more than $2.5 trillion in payroll tax that was spent on non “safety net” spending? Or do you believe that those who don’t own property and investments should pay for the protection of those who do? Sounds to me like you want Feudalism, not capitalism. That’s certainly more true than your assertion that I’m supporting Marxism. Show me where. I believe investors should pay for the government services they take. They don’t.
      \\
      PS The last time I checked, unemployment is insurance, paid for by deductions from payrolls of people while employed. Is it “welfare” when a family collects the life insurance benefit when a member of that family dies?

      • Tom D says:

        Wow, Howard. All I’m saying is that there are various types of safety nets to serve various needs, one or more of which exist for your problem with market prices for foods. You seem to want to reduce all of these nets and adjustments to a “tax” item, pro or con. The system isn’t specifically designed for price protection for anyone or scored as a +/- tax. But price protection is available through options and futures and also through socially-financed safety nets of various types. Are they perfect? No. Is anything?

        Keep in mind that your Keynesian kooks are praying and working earnestly for price increases just now.

        Do I sense bit of guilt from someone who greatly aided mortgage packagers to do their dirty deeds? If true does that make everyone else guilty of something equally terrible? Maybe or maybe not. I don’t see the connection.

        Tom D

      • Larry says:

        I vote for NONE OF THE ABOVE.

        Who’s with me?

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