Have you heard the hubbub about eggs? People say that they’re expensive. My wife told me that if she’s going to pay an arm and a leg, then she may as well get the organic, pasture raised eggs. Absolutely. That’s what the substitution effect predicts. As the price ratio of low-quality to high-quality eggs rises, we’re incentivized to consume more of the high-quality version. It has to do with opportunity costs.
Consider a world in which the low-quality eggs cost $2 and the high-quality eggs cost $6 per dozen. Every high-quality egg costs 3 low-quality eggs. You might still choose the high-quality option, but you know that you’re giving up a lot by doing so. Consider the current world where low-quality eggs are priced on par with high-quality eggs. Now, the opportunity cost of consuming the fancy, pasture-raised eggs has fallen. When consuming one high-quality egg costs you one low-quality egg, it’s much easier to opt for the high-quality version. You’re not giving up as much when you purchase it.
For vegetarians, the recent price swing has probably been rough. Not eating meat, they’re facing the price squeeze more so than their omnivorous counterparts. Through the magic of math, median wages, and average retail prices, the figure below charts the affordability of eggs and dairy products.* The median person has been facing falling egg affordability for two decades. Indeed, it’s only been the past few years, punctuated by the Covid crisis, that consumers experienced more affordable eggs.
Dairy products, however, have become much more affordable. The median American can now afford 50% more of their namesake cheese. Further, we can afford 20-25% more whole milk and cheddar cheese. So, the vegetarians are not so poorly off after all.
Why does the average drinker consume alcohol? There are plenty of reasons, one of which is social. Alcohol, while inhibiting clarity, precision, and discretion, is a social lubricant. If you’re one of those drinking, then it’s enjoyable to be around other drinkers. Also, people build the habit of drinking *something* while socializing. We all know that prohibition resulted in bootlegging and tainted cocktails. But what were the legal alternatives? One was that you could purchase grape juice and make your own wine (that’s a story for another time). Another is to switch to another drug.
Alcohol is a depressant and arguably the most popular one in the US. It’s not a clear substitute for alcohol in terms of its direct effects on the body. However, it’s a liquid, safe, and tasty. That make is a good candidate for satisfying the physical urge to imbibe. But, importantly, it is also a social drug. People would get so hopped up on coffee and feed off of one another’s high that Charles the II of England banned coffee houses in order to prevent seditious fomentation. This brings us to an important characteristic of coffee. It’s a stimulant. You’d think that a stimulant would not be a substitute for alcohol. If anything, one might think that they are complements. Coffee helps to provide that kick in the pants after having an enjoyable night. But, the social feature makes coffee a good candidate to substitute alcohol, should the times be dire.
Illegal activity aside, people wanted an outlet for their physical and social proclivities. They wanted intoxication. Coffee provided exactly that. Conveniently, the continental US didn’t grow any of its own coffee. That means that imports and domestic consumption have a tight relationship.
Today the largest annual gathering of economists begins, in-person for the first time in 3 years. It won’t be as big as the pre-Covid conferences, but I’m excited to spend a few days in New Orleans for the first time since I moved away in 2017. I lived there for 4 years; in the eventful 5 years since my knowledge likely became somewhat out of date, but I hope I can still provide some guidance for those new to the city.
For most people the main destination is the French Quarter. People are right about this; it is great to walk through to see the old colonial buildings, hear the street music, and eat the food. Some of the ASSA hotels are in the Quarter, but for those staying downtown or in the Warehouse district its definitely worth the walk. The Quarter is a big, diverse place, not only for tourists. Bourbon Street is the tourist trap. It is probably worth seeing once, but be prepared for crowds, loud music, and touts trying to get you into bars and strip clubs. The standard advice now is to skip Bourbon St and hang out on Frenchman street instead- which is in the Marigny, just east of the Quarter. There are two blocks entirely packed with bars / jazz clubs. Any evening you will have at least 5 shows to choose from, usually jazz, usually with no cover. Café du Monde is the other Quarter attraction that everyone does, and with good reason. They have decent coffee, and great beignets (a donut / fried dough sort of thing drowned in powdered sugar). There is often a long line to get a table or to get to-go, but usually not for both at once. There is a river walk just south of Café Du Monde, and the Jackson Brewery building is just east- there is a good place to sit and look at the river beside their food court.
In a short trip it would be entirely reasonable to just stay in the Quarter. But if you’d like to get out, the main attraction of New Orleans to me is the parks. Audobon Park is west of the Quarter in Uptown. It stretches from the Mississippi river to the Tulane and Loyola campuses. City Park is north of the Quarter in Mid-City, and is home to the Art Museum and Sculpture Garden. Both can be reached by trolley, and both are full of lovely ponds and interesting waterfowl. At the big lake in city park you can rent kayaks, or get a ride in a gondola.
People associate New Orleans with Cajun food, but most of the Cajuns settled to the west. The traditional New Orleans cuisine is Creole- a blend of the Italian, French, and other settlers. When I think about what makes restaurants attractive, I think about three things- food, prices, and everything else (service, wait times, ambience). In New Orleans it is very easy to find places with great food at good prices, but rare to find good places that also have short wait times and good service (Commander’s Palace, the best restaurant in the city, is already booked solid). My restaurant recommendations are the thing most likely to be out of date, so I’ll keep it short:
Central Grocery- original home of the Mufalleta, a creole sandwich. In the French quarter.
Dat Dog- fancy hot dogs (mostly sausages) with more toppings than you could ever want to choose from (including crawfish etouffee). One location is on Frenchman St- you can often hear live jazz from the bars by while sitting on their balcony. Cheap.
Hotel Monteleone- classy bar, often with live jazz, home to the rotating Carousel bar. One of many good places to try old New Orleans cocktails like the Sazerac. I’ll be staying here trying to get a spot on the Carousel.
New Orleans is unlike anywhere else in the US, almost like a Caribbean island (it practically is an island, surrounded by lakes, rivers, and swamps). The highs (food, music, knowing how to have a good time) are higher than just about anywhere else here, though the lows are also lower. One of the most special things about it is Mardi Gras. Mardi Gras day isn’t until February 21st this year, but Mardi Gras is really a whole season in New Orleans- and the first parade, Krewe of Joan of Arc, starts right in the Quarter on Friday January 6th (Twelfth Night).
Enjoy the city, and let me know if you’d like to meet up.
I make a hobby of reading, and sometimes acting on, investment advice, particularly regarding high-yielding securities (many of my holdings are now yielding over 10%/year). One of the best authors on the Seeking Alpha investing site writes under the name of Colorado Wealth Management. He mainly writes on REIT (real estate investment trust) stocks, but recently opined on the wisdom of raising interest rates to combat inflation regarding some of the major components of CPI.
His article, Why High Yields Will Be Popular Again, may be behind a paywall for some readers, so I will summarize some key points. He kind of sidesteps the influence of massive federal deficit spending that injected trillions and trillions of new dollars into the economy for COVID, which I think has been the major driver for this inflation; and the reignited deficit spending which is already on the books for November and likely even huger for December of this year. However, he does make some interesting (and new to me) points regarding food prices in particular.
He sees the price 2021-2022 price increases in some major food items as being driven by supply constraints, rather then by excessive demand. Specifically eggs, coffee, and vegetable oils have been hit by exogenous factors which have constrained supply; raising interest rates will not help here, and may even hurt if higher rates make it harder for farmers to recover and re-start high production. I’ll transition to his charts and mainly his excerpted words, in italics below:
Avian Flu, Culled Hens, and the Price of Eggs
The background here is that tens of millions of chickens, including egg-laying hens, have been deliberately killed (“culled”) this year in an attempt to slow the spread of avian flu. This, of course, cuts into the egg supply and raises egg prices. We went through a similar cycle in 2015 with avian flu, where culling led to a rise in egg prices, but then prices fell naturally as a new crop of chicks grew into egg-laying hens. Similarly, the current shortage in eggs should correct itself:
Raising interest rates has never produced additional eggs. Raising interest rates and driving a recession (with larger credit spreads) only makes it more difficult for farmers to get the funding necessary to replace tens of millions of hens that were culled to slow the spread of the avian flu….If interest rates don’t work, what will? The cure for high prices is high prices. We can see how it played out with the Avian flu in 2015:
Is Jerome Powell going to lay even one egg? Probably not.
Are farmers going to focus on turning their chicks into egg-laying hens? Absolutely.
Since eggs go into several other products, it drives inflation throughout the grocery store. Even if a product doesn’t use eggs, the drop in egg production means more people eating other foods.
Drought in Brazil and the Price of Coffee
Coffee prices have been rising rapidly. Well, domestic prices have been rising rapidly. Global prices actually declined since peaking in February 2022:
So, what drove the price up? Brazil normally produces over 35% of the world’s coffee and bad weather in Brazil (not to mention the pandemic impacts) drove dramatically lower production in 2021. As the shortfall in production became evident, global prices began rising rapidly. That’s why the global [wholesale] prices were ripping higher in 2021, not 2022. However, [retail] consumers are seeing most of the impact over the last several months.
War in Ukraine and the Price of Sunflower Oil
Margarine requires vegetable oil. Soybean, palm, sunflower, and canola oil are the key ingredients. What country produces the most sunflower oil? Ukraine. This is one of several inflationary impacts of the war. You can see the impact of reduced supply in the following chart:
Government Bungling in Indonesia and the Price of Palm Oil
What happened to palm oil? How could it soar so much and then fall so hard?
The first issue is that dramatic increases in the price of fertilizer made production more expensive. … That contributed to a reduction in supply. However, Indonesia is the world’s largest exporter of palm oil. Yet exports of palm levy were subject to a huge levy. That made exporting far more expensive. Despite the levy, it was still worth producing and exporting palm oil. Then the Indonesian government decided to simply ban exports over concern about higher domestic prices. Banning exports for a country that produces 59% of the world’s total palm oil exports had a predictable impact.
If you guessed that the supply of palm oil couldn’t be sold domestically, you’d be right. The ban was lifted. However, it was only after:
“High palm oil stocks have forced mills to limit purchases of palm fruits. Farmers have complained their unsold fruits have been left to rot. There were 7.23 million tonnes of crude palm oil in storage tanks at the end of May, data from the Indonesian Palm Oil Association (GAPKI) showed on Friday.“
With palm oil prices at all time-record highs, nearly triple the level from two years prior, the supply was left to rot. Each business tried to make the best decision they could, given the ban on exports. Rather than record profits for mills and record profits for farmers, the produce was wasted. That’s supply constraints for the global market, and it destroys the local economy.
Global prices are plunging now as mills seek to unload their storage. As bad as the higher prices were for the rest of the world, no one suffered worse than the farmers whose product became worthless as a result of government failure.
Contrary to today’s popular opinion, higher interest rates won’t do anything to improve production of vegetable oil.
Last year inflation hadn’t quite hit the levels we would see in 2022, but they were already rising. When Thanksgiving rolled around, many media sources were reporting that it was the “most expensive Thanksgiving ever.” In nominal terms that was true, though in nominal terms it isn’t that surprising. In a post last year, I compared the prices of Thanksgiving dinners (using the same data from Farm Bureau) to median earnings going back to 1986. While 2021 was more expensive the 2020, it turned out it was still the second lowest it had been since 1986.
As you might expect, this year’s Thanksgiving dinner is even more expensive than last year in nominal terms. It’s up about 20% since last year or over $10 more, according to Farm Bureau. That’s certainly more than the overall rate of inflation (7.7% in the past 12 months) and more than inflation for groceries (12.4% in the past 12 months). But how does that compare with median wages? Comparing the 3rd quarter of this year with the same quarter in 2021, median wages are only up about 7%, certainly not enough to keep up with those rising turkey prices.
When we add 2022 to the historical chart, here’s what it looks like.
The spike in the last 2 years is clear in the chart but notice that at about 6% of median weekly earnings, we have essentially returned to the average level of the entire series. From 2017-2021, we could be thankful that the price of your Thanksgiving dinner had dropped below that 6% level. We’ll have to find something else to be thankful for this year.
If you’re like me, then you are very fond of food. What determines the price of food? Supply and demand of course!
We can consider food as a commodity because just about anyone can buy and sell it. Almost all foods have partial substitutes. Therefore, the long-run price in the competitive market for food is largely dictated by the marginal cost. Demand has an impact on the price only in the short run.
A long-run driver of food prices are the costs that food producers face. The US Bureau of Labor Statistics divides the Producer Price Index into multiple categories that are relevant for a variety of sectors and points within the production process. Below is a table of the most fundamental, relatively unprocessed farm products and their weight among all farm products in December 2021. Cotton is a relatively large component for farm products even though it’s not a food and I include it for completeness. Fruits, veggies, and nuts makeup the overwhelming proportion of the cost of farm products. I was at first surprised that grains composed such a small proportion. But, being dirt cheap, it makes sense.
We all know that inflation has been in the news. It’s been elevated since the second quarter of 2021. Consumer prices tend to lag producer prices. One indicator of where food prices will be in the near future is where the producer prices are now. Below is a graph that displays the above seasonally adjusted farm product prices since the start of 2021*.
Gallup has polled Americans for many decades about their smoking habits. About 40-45% of adults smoked cigarettes from about 1945-1975, but the percentage has dropped steadily since then. A 2022 poll showed a new low of 11% being smokers. Roughly three in 10 nonsmokers say they used to smoke.
On the other hand, marijuana usage has climbed steadily since Gallup first asked about it in 1969. Some 16% of Americans say they currently smoke marijuana, while a total of 48% say they have tried it at some point in their lifetime:
Younger adults (18-34) are much more likely to be current users, but the 55+ crowd tried it nearly as much (44%) as the younger cohorts:
Among all adults, opinion is about evenly split on whether marijuana has a positive or negative effect on society and on people who use it. However, opinion is skewed very positive among those who have actually tried it, and negative among those who have not:
(I can’t resist inserting a consistent anecdotal observation by reliable people I know or know of, that habitual smoking of MJ tends to be highly correlated with passivity / lack of initiative, especially among young men. When one young man I know of told his counselor, “Nothing happens [when I smoke weed]”, the response was, “That’s the problem, nothing happens [because with weed you just chill and don’t do the stuff you need to do].” Of course, correlation says nothing about the direction of causation here).
The big gorilla of substance usage is still alcohol. About 45% of Americans have had an alcoholic drink within the past week, while another 23% say they use it occasionally. Alcohol use has remained relatively constant over the years. The average percentage of Americans who have said they are drinkers since 1939 is 63%, which is close to Gallup’s most recent reading of 67%.
Since they were first introduced as part of the Dollar Menu in 1997, the McDouble and the McChicken have been my go-to choices when I visit Mcdonald’s. It was always hard to justify getting one of the fancier sandwiches like a Big Mac or Quarter Pounder, since they were 4-5x the cost of a McDouble but only about twice the size. This is part of why the McDouble has been called “the greatest food in human history“. But as we’ve seen with the plagues and wars of the 2020s, history doesn’t always progress in the direction you’d hope.
I hadn’t been to a McDonald’s for a while until last weekend, when I was shocked to see the McDouble and McChicken listed at $2.99. This wasn’t at an airport restaurant either, or even in an expensive big city; I stopped in Keene, New Hampshire on a drive home from Vermont. The price is up 200% from the days of the Dollar Menu! Meanwhile, the Big Mac has also got more expensive, but much less dramatically; it was $5.89, compared to the ~$5 I expect. So, 200% price increases at the bottom, vs 18% at the top.
This location may be a bit of an anomaly, but the big picture is clear; a typical McDouble now costs well over $2 in most of the US, while a typical Big Mac is still well under $6. You used to be able to get 4-5 McDoubles for the price of a Big Mac; now you typically get less than 3 and sometimes, as in Keene, less than 2.
What’s going on here? First, the McDouble was always absurdly cheap. Second, prices rise most quickly where demand is inelastic, and demand is less elastic for goods that are cheaper and goods that are more like “necessities” than “luxuries”.
This is why I think the McDouble is worth highlighting- its part of a more general trend of where inflation hits. I’ve noticed this in the grocery store as well; the price of standard ground beef is up much more than grass-fed organic beef, likewise with standard eggs vs free-range organic. How different would the Economist’s Big Mac Index look if it used the McDouble instead?
With falling inflation we may see the end of this necessity vs luxury price compression. But I doubt we’ll ever see the glory of the standard $1 McDouble again.
The New Hampshire McDonalds was disappointing, but Vermont was nice
There are lots of fun coffee shops in Birmingham. I’m going to limit this list geographically to make it a “crawl” that you could potentially bike around. I’ll list the cute places I know that are between Railroad Park downtown and Samford University south of Birmingham.
Starting at the North end, coffee shops that border Railroad Park:
In a world where China and India continue to build huge, CO2-belching coal power plants, and a world where global supply chains can no longer be taken for granted, you might think that a small, crowded country like the Netherlands would prioritize home-grown food production over concerns about greenhouse gas emissions from a relatively small volume of cow manure. But this is Europe, the land of eco-utopianism, and so you would be wrong.
Cow poop does emit nitrous oxide (a greenhouse gas) and ammonia (which can potentially pollute local water if uncontained). In a burst of green virtue, the Netherlands has, “unveiled a world-leading target to halve emissions of the gasses, as well as other nitrogen compounds that come from fertilizers, by 2030, to tackle their environmental and climate impacts.” This target is expected to result in a 30% reduction in livestock numbers and the closure of many farms. Dutch farmers are not amused, and have vented their ire by dumping hay bales on highways and smearing manure outside the home of the agricultural minister. Protests over green policies hobbling local farmers have spread to Germany and Canada.
All this raised in my mind the question, could we really get along with using much less nitrogen-based fertilizers? I found a great article by Hannah Ritchie on OurWorldinData.org, “Can we reduce fertilizer use without sacrificing food production?”, which provides lush tables and graphs on the subject.
First, it’s estimated that artificial nitrogen fertilizers (where hydrogen, mainly derived from natural gas, is reacted with atmospheric nitrogen at high pressure over catalysts to make ammonia and derivatives) allow the world’s population to be about twice as high is it would be otherwise. Put another way, take away nitrogen fertilizers, and half of us die. So any campaign to massively scale back on fertilizer usage would result in mass starvation. You first…
That said, Ritchie’s article pointed out that some countries such as China seem to be (inefficiently) using much more fertilizer than they need to get similar results, some countries (e.g. America) seem to be about in balance, and some areas (e.g. sub-Saharan Africa) would benefit from using more fertilizer. So globally we could probably use a bit less fertilizer if the profligate countries used (a lot) less, while the deprived countries used a little more.
I’ll conclude with two charts from Ritchie’s article. The first chart shows, for instance, that Brazil uses twice as much fertilizer per hectare or per acre as the U.S, and China uses three times as much, while Ghana uses about a tenth as much.
The second chart shows estimated nitrogen use efficiency (NUE). An NUE of 40%, for instance, shows that 40% of the nitrogen in the fertilizer is converted to nitrogen in the form of crops, while the other 60% of the nitrogen becomes pollutants. In China and India, only about a third of the applied nitrogen is fully utilized, compared to two thirds in places like the U.S. and France. ( Some countries have a very high NUE – greater than 100%. This means they are undersupplying nitrogen, but continue to try to grow more and more crops. Instead of utilizing readily available nutrients, crops have to take nitrogen from the soil. Over time this depletes soils of their nutrients which will be bad for crop production in the long-run).
Economist Writing Every Day 