Freight prices rising; Sen. Rockefeller says Congress must intervene

To the chagrin of West Virginia Sen. Jay Rockefeller, rising freight costs are a reality:

  • Nike Chief Executive Mark Parker said yesterday that  “rising freight, labor and oil costs are likely to add pressure to future results.”
  • Levi Strauss & Co. said earlier this week that it is raising prices on some products to cover rising costs “for raw materials such as cotton as well as for labour and freight.”
  • Across the pond, Associated British Foods said earlier this month that “high cotton prices and freight costs will put pressure on profit margins next year.”
  • Back in the U.S., ethanol producers are warning of higher shipping costs too: “Going forward, exports will be affected by an increase in shipping rates[.]  Container rates are expected to increase Oct. 1 by $300-400 per container. Rail rates will take an annual new crop increase, and physical rail cars themselves are tight and expensive.”

(Emphasis added.)

I’ll leave it to Inflation Watch readers to decide whether Congress should regulate railroad freight prices, as Sen. Rockefeller proposes.

What is going on with cotton prices?

Notwithstanding a pullback the past two days, cotton prices have been on a tear lately, recently surpassing $1 per pound for the first time since the 1990s. From various news reports, it appears that the surge is due to  recent floods in Pakistan coupled with unusually strong demand in China and elsewhere for cotton fiber and yarn. It will be interesting to see whether textile producers and clothing retailers can pass along higher prices to consumers.

Gold prices continue to rise

The price of gold, which has nearly doubled in the past two years, hit another all-time high yesterday.

Rally in lumber prices continues

In April of this year, lumber futures rocketed to a four-year high of $337. In less than three months, prices fell almost 50%. However, on Tuesday, unexpectedly high housing starts sent lumber futures soaring. Bloomberg reported:

“Lumber futures for November delivery rose the CME’s $10 daily limit, or 4.5 percent, to $232 per 1,000 board feet as of 9:12 a.m. in Chicago. That’s the highest price for a most-active contract since Sept. 14.”

The recent recovery in lumber prices keeps the uptrend from the early 2009 lows intact and suggests that the highs in April will give way sooner than later.

Lumber futures rally again

Lumber futures rally again

High Commodity Prices Force Starbucks to Increase Its Prices

Coffee drinkers at Starbucks will soon be waking up to more than just caffeine. Starbucks will now greet its customers with higher coffee prices to compensate for 13-year highs in the price of green arabica coffee and what the company calls “significant volatility” in the prices of milk, sugar and cocoa.

Starbucks announced its plans in a news release titled “Starbucks Responds to Surging Green Coffee Prices” (September 22, 2010):

“Company to Implement Targeted Price Adjustments; Will Hold the Price of Tall Brewed Coffee at $1.50 in Most U.S. Markets; Retail Packaged Coffee Price Increases Possible”

Starbucks blamed “speculators” for the high prices, and lamented that it is one of the last in the industry to pass on these soaring costs to customers.

The Seattle Times highlights other past price increases at Starbucks:

“Last year, Starbucks raised prices on some drinks, including Frappuccinos, when it also dropped prices on other beverages. In 2007, it raised prices across the board an average 9 cents because of high dairy prices. That followed a nickel increase a year earlier.”

AK Steel increases prices to offset rising material costs

Yesterday, AK Steel (AKS) warned investors that earnings would be lower than expected partly due to increasing material costs (mainly iron ore). Today, AK Steel told its customers that prices will increase as part of an effort to recoup some of those rising material costs. These price hikes are also enabled by strong demand for stainless steel products.

AKS will raise prices for specialty flat-rolled stainless steel products by about 5% to 10%. These products include “…tensilized, bright annealed and special finishes, along with special mechanical requirements.”

Full disclosure: author owns shares of AKS

Flat core CPI raises odds of more quantitative easing

The Bureau of Labor Statistics (BLS) reported the consumer price index (CPI) increased 0.3% from July to August on a seasonally adjusted basis (0.1% non-seasonal).

Most interesting was the core CPI, CPI less energy and food, remained flat. Most notable amongst the basket of items was apparel and shelter. These are the only two items that have declined in price over the past 12 months, and their monthly price changes for August were also amongst the lowest, -0.1% for apparel and flat for shelter.

The persistence of these low readings now has analysts speculating that the odds have increased that the Federal Reserve will announce next week a second official round of quantitative easing.

Higher raw material costs contribute to AK Steel earnings warning

AK Steel (AKS) reduced its earnings outlook, partially due to higher material costs:

“The company’s revised third quarter outlook primarily reflects costs associated with the acceleration of planned maintenance work at its Ashland (KY) blast furnace, as well as higher raw material and operating costs than were expected at the time of its previous guidance…

…The impact of these changes on the company’s original guidance for the third quarter would result in an operating loss of approximately $20 per ton for the third quarter of 2010. The company’s original guidance was for an operating profit of $15 per ton for the third quarter. Nearly half of the lower expected financial results for the third quarter are attributable to the acceleration of the Ashland blast furnace outage.”

AKS goes on to state that it is expecting that the 2010 global iron ore benchmark price will increase higher than the company’s previous expectations for a 65% year-over-year gain.

Full disclosure: author owns shares in AKS

India continues to fight inflation

The Reserve Bank of India (RBI) hiked interest rates more than expected by 25 basis points to 6%.

The RBI has a laser focus on keeping inflation expectations contained. Although inflation seems to have peaked, the RBI remains worried that it needs to “…end the prevalence of negative real interest rates.”

From today’s statement:

“Inflation remains the dominant concern in macroeconomic management…inflation rates have reached a plateau, but are likely to remain at unacceptably high levels for some months. While prices of food articles, which according to the new series, rose by over 14 per cent in August, are still contributing to the pressure, about two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5.0–5.5 per cent in the 2000s. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectation.”

Airfares in the United Kingdom Surge At A Record Pace

It looks like American flyers are not the only ones paying higher fares. Across the Atlantic, air passengers in the United Kingdom paid 16.1% more to fly in August than in July, a record seasonal increase. This dour news was part of the U.K.’s latest inflation report that showed consumer price inflation above the government’s 3% limit for a sixth month in a row. The core rate of inflation was up 2.8%, higher than the 2.5% consensus forecast. Maybe we can export some of our deflationary fears to help out the cause.

See “U.K. Inflation Unexpectedly Exceeds 3% on Air Fares, Food” for more details.

Copper On the Move Again

(Originally appeared in “One-Twenty Two” as “Copper Defying Double-Dip Dangers“)

Copper has quickly recovered almost all its losses from the sell-off that began in May. Copper is potentially heading for fresh post-crash highs.

Copper is challenging its post-crash highs

Copper is challenging its post-crash highs


Of course, copper is now much more important to the emerging and developing markets than to developed economies like America’s, but I think this price recovery provides a remarkable contrast to current fears of double-dips and deflation.

One could also interpret this price action as anticipation of more money-printing and stimulus from the developed economies instead of a positive indicator of fundamental future economic health. An even more bearish interpretation of the chart might point to the potential head and shoulders formation and/or the marginal lower low in June. These technicals definitely work against copper’s case form this perspective. However, until copper fails at the April highs, I believe the 25% rally off the June lows should be taken seriously. Similarly, a break above those highs will be very bullish and suggest a continuation of the rally off the late 2008 lows.

As with any technical call like this one, confirmation of the signal must precede confidence. So, I am neither bullish nor bearish here on copper, just alert. For an example of how charts of copper’s price have been used to forecast potential economic danger, see “The Doctor is Calling” by Mike Shedlock at MISH’S Global Economic Trend Analysis (September 25, 2006). In this case, copper failed to confirm the bearish signals and instead proceeded to rise in price for almost another two years before finally peaking and then crashing.

Airfares Near Pre-Recession Levels

Airlines are making money again thanks to the pricing power that has come from an economic recovery and reductions in overall capacity. The improved pricing has allowed airlines to charge for an array of services that were once free. In addition, domestic leisure airfares have increased 20% year-over-year from the second quarter, international fares are up 30%, and business travelers are paying 12% more. Another metric, the price paid per passenger per mile, is only 3.9% off the 15.56 cents from July, 2008 which was the highest for the past 10 years.

All these price increases have translated into seven straight months of revenue growth and major airlines are generating impressive profits. For example, Delta made $467M last quarter; its best quarterly showing in a decade. These results mark a sharp rebound from the decade-low prices at the depths of the recession and from the extremely high oil prices that squeezed airlines before that.

For more details see “After Bargains of Recession, Air Fares Soar” in the New York Times (September 5, 2010).