Thursday, February 10, 2011

Skyrocketing Food Prices: Blame Bernanke?

Secretary of Agriculture Tom Vilsack has done a very credible job in managing federal farm policy. However, no one inside or outside of Washington has done more, unwittingly, for agriculture than Federal Reserve (Fed) Chairman Ben Bernanke. Since bailing out (my term) Bear Sterns in March 2008, the Fed, under the guidance of Bernanke, has expanded the nation’s money supply by 145 percent.

This has had the impact of lowering the yield (interest rate) on short term Treasury bills from 3.27 percent just before the recession began to today’s rate of 0.15 percent. And due to the Fed’s unprecedented intervention in the nation’s long term U.S. Treasury market (via QE1 and QE2), the rate on the 10-year U.S. Treasury has plummeted from slightly over four percent to just over three percent. This action by the Fed has reduced the value of the dollar and stimulated demand for commodities, especially food. For example over the past year, prices have soared by 18 percent for all farm products, by 43 percent for corn, and by 50 percent for all grains. The Fed and Bernanke must take credit, or blame, for skyrocketing farm prices, farm income and farm land values.

Is this the next bubble to burst or is it just the beginning of rapidly rising prices for non-food items? I argue that it is a little of both. While Bernanke will never assume the liability or credit for stimulating farm income, he has served up a healthy expansion for farm country and deserves to share the secretarial crown with Mr. Vilsack. Ernie Goss

1 comment:

Intrinsic Value said...

I wouldn't blame it all either on Ben, there are also supply and demand factor coming in the commodity realm.