I picked this off Al Kreb's very useful AgBiz Examiner. It made me
think back to our discussion about Argentina. I mentioned that the
Argentina/Korea comparison was invalid because it did not take account
of the changing terms of trade. Of course, Korea is not a member of
OPEC, so the comparison is nnot exactly appropriate -- but it reminds us
of how important changing terms of trade can be.
A recent report by the Worldwatch's Lester Brown points out that while
the U.S pays for its oil imports in part with grain exports,
exports of grain and oil are each concentrated in a handful of countries
with grain coming largely from NorthAmerica and oil mostly from
the Middle East.
"The United States, which dominates grain exports even more than Saudi
Arabia does oil, is both the world's leading grain exporter and
its biggest oil importer. Ironically, all 11 members of OPEC are grain
importers.
"Using the price of wheat as a surrogate for grain prices, shifts in the
grain\oil exchange rate can be easily monitored. From 1950 through
1972, both wheat and oil prices were remarkably stable. In 1950, when
wheat was priced at $1.89 a bushel and oil at $1.71 a barrel, a
bushel of wheat could be exchanged for 1.1 barrels of oil. At any time
during the 22-year span, a bushel of wheat could be traded for a
barrel of oil on the world market.
"With the 1973 oil price hike, this began to change. By 1979, the year
of the second oil price increase, OPEC's strength had pushed the
exchange rate to roughly four to one. By 1982, when the price of oil had
climbed past $33 a barrel, the wheat\oil ratio had climbed to
eight to one. This steep rise in the purchasing power of oil led to one
of the greatest international transfers of wealth ever recorded.
"Today, 27 years after the first oil price hike, the terms of trade are
again shifting in favor of OPEC. With grain prices at their lowest
level in two decades and oil prices at the highest level, in a decade,
the wheat\oil ratio has shifted to an estimated ten to one this year."
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
