In January of this year, olive oil prices fell to 2009 levels. Four months later, prices have fallen to ten year lows. Consumption has plummeted in olive oil producing nations Greece, Spain, and Italy, together responsible for 70% of the world’s production. In parallel, a supply glut has hit the market due to a bumper crop in Spain. Meanwhile, struggling consumers have substituted cheaper oil like sunflower oil.
This price drop has put additional pressures on some of Europe’s poorest regions.
For more details see “Europe’s (olive) oil crisis“
Although agricultural prices have generally decreaed for several months, coffee included, Starbucks (SBUX) announced today that it will hike the prices of some beverages by about 1% in the Northeast and the Sunbelt regions of the U.S. SBUX cites “the prices reflect competition in certain markets and higher costs for coffee, fuel and other commodities.”
Note that Starbucks stock was actually down today while the major indices experienced strong rallies.
For more detail see “Starbucks to raise prices in certain regions”
The NY Times describes how the increasing prices of crops has allowed farmers to increase farm acreage into previously unthinkable plots. Marginal land is now productive land with the high prices available for crops.
“Across much of the Midwest the sharp increase in farm earnings has driven the price of farmland to previously unimaginable — and, some say, unsustainable — levels. But in the process, to much less fanfare, the financial rewards have also encouraged farmers to put ever more land into production, including parcels that until recently were too small or too poor in quality to warrant a second glance…
…farmers, flush from the most profitable years in decades and looking for better places to store money than low-interest savings accounts or a turbulent stock market, are putting their money in land.”
According to an Iowa State study, farmland in Iowa increased 32% last year to $6,700 per acre.
See “As Crop Prices Soar, Iowa Farms Add Acreage” for more details.
Global supplies of agricultural products are expanding, perhaps in response to past shortages. These forces are driving down prices and discouraging hedge funds from making bullish bets in agricultural commodities. According to Bloomberg in “Funds Reduce Bets on Rising Food Costs to Lowest in 27 Months: Commodities“, the bullishness of hedge funds has reached lows not seen in over two years.
Here is a key quote that describes the situation:
“World food prices tracked by the United Nations retreated for a fifth consecutive month in November, the longest decline in more than two years. The U.S. government said Dec. 9 that combined global inventories of corn, soybeans and wheat will be 3.2 percent larger than anticipated a month earlier. Cocoa capped its longest slump in 50 years last week on increasing supplies from Ivory Coast, the world’s biggest producer.”
DBA, the PowerShares DB Agriculturae Fund ETF, tells the story. the ETF has now sunk to 14-month lows. Today’s price marks the previous post-recovery high in 2009.
On Thanksgiving Day, NPR’s Marketplace included a follow-up segment to a story from 2009 on Jennifer Reese, a San Francisco woman who set out to determine when it is really cheaper to make things at home versus buying in the store. She has now published a book about her experience called Make the Bread, Buy the Butter: What You Should and Shouldn’t Cook from Scratch — Over 120 Recipes for the Best Homemade Foods.
Her general conclusion is that it is cheaper to do the “non-glamorous” things at home, but glamorous activities like raising chickens, goats, and turkeys cost too much in infrastructure to make it worthwhile. It is definitely cheaper to make your own bread and muffins but more expensive to make candied ginger. It is cheaper to buy lemonade than make it – not to mention all the effort it takes to squeeze the lemons. Reese also addresses convenience, food quality, and moral choices.
The book looks like a worthwhile read for those considering to beat higher food costs with homegrown and homespun creations.
On November 4, 2011, NPR’s Planet Money did a “blast from the past” podcast reviewing the course of events that led to the rice panic of 2007 and its eventual end. From India’s decision to ban rice exports to hoarding across Asia to corrupt government manipulation in the Philippines of a then vulnerable rice market, we get to reminisce about how rice prices doubled ad then almost doubled again in just four months. The panic finally ended after economists convinced the U.S. to allow Japan to sell its stockpile of rice that it maintains as part of a trade agreement that forces Japan to buy rice from the U.S. it does not want. Ironically enough, the rice was never sold but the psychological impact of the announcement was enough to end the hoarding and bring the market back to a semblance of sanity.
A truly fascinating tale of a completely avoidable bubble in the price of rice.
(Hat tip to a friend who pointed me to this article)
Under Alan Greenspan, the Federal Reserve was known to stand on the sidelines while bubbles in asset prices grew and grew. Greenspan had a lot more faith in the Federal Reserve’s ability to mop up the subsequent mess caused by a bubble’s collapse than in its ability to stop a bubble, much less identify one.
It seems times have changed. On October 13, Businessweek chronicled the Fed’s efforts to make sure that soaring prices in agricultural land do not lead to another messy bubble and economic calamity. Prices have indeed soared across the midwestern United States:
“The Kansas City Fed reported land values were 20 percent higher than a year ago. The Chicago Fed reported a 17 percent increase in its district, the fastest increase since the 1970s. Nonirrigated farmland in the Minneapolis Fed district increased 22 percent in price.”
The factors driving these increases are the same as I reported from a related Planet Money piece: “Land prices have doubled in Iowa over the past few years“: “elevated crop prices, soaring farm income, and record-low interest rates.”
As a result, nervous regulators are demanding rigorous stress tests of banks up to their gills in agricultural loans. Businessweek also reports that regulators are “…scrutinizing the lending standards, loan documentation, and risk management at the country’s 2,144 agriculture banks.”
I will be very interested in the outcome of all this scrutiny. The same Federal Reserve that helped create record low interest rates is working to ameliorate the impact of those very same interest rates. This episode is a reminder that flooding an economy with liquidity does not produce equal outcomes for all sectors. Recovery and prosperity does not even need to appear in the sectors most impacted by the malaise the Federal Reserve scrambles to repair. Instead, the money tends to collect where it will generate the highest returns due to other economic factors. Currently, it seems that the bet is on farming. I believe the Federal Reserve was aiming for housing…
Land prices have doubled in Iowa over the past few years. The team at Planet Money conclude that the land boom throughout the agricultural U.S. Midwest is being driven by “real” economic forces. They identify low interest rates, grain traders, and government subsidies for ethanol as key drivers of this boom. Low interest rates are enabling land purchases. Grain traders and the demand for ethanol are driving up corn prices which in turn make land for growing corn more dear. Starting with auctions in Iowa, Planet Money takes us to a part of the country that is booming while much of the rest of the country is stagnating.
Finally, one “seasoned farmer” warns that this boom is indeed a bubble and points to the crash in land prices in the 1980s after a similar period of exuberance.
Listen to “The Tuesday Podcast: The Land Boom“
Global machinery company Caterpillar, Inc. (CAT) filed an 8K with the SEC announcing some pricing actions that hike prices worldwide. From the release:
“Caterpillar is announcing price action of 0 – 3% worldwide on most machines. This price change will be effective January 2012.
In addition, emissions-related price increases of 2-6% will also apply in January for applicable products and regions.
This price change is a result of current industry factors as well as general economic conditions. Details by product will be released to dealers in the near future, and will vary across geographic regions and products.”
This is a surprising announcement given the rapid decline in commodity prices in the past several months and an earnings warning from Ingersoll-Rand (IR) announced just today. This pricing news suggests that global economic conditions are not yet recessionary.
Hurricane Irene may have ruined Halloween for people living in the Northeast. The heavy rains from the hurricane washed out entire pumpkin crops and farmers are scrambling to save what little they have left. Farmers in unaffected areas are seeing pumpkin orders increase. The result is a doubling in current prices at the retail level. According to CNBC: “The wholesale price for a bin of 32 to 45 pumpkins ranged from $150 to $200 in upstate New York, about twice the normal price.”
The pumpkin crop is facing additional problems:
- Postponed planting due to heavy rains before the hurricane.
- A fungus breakout
- A cold snap that could kill the remaining few pumpkins
Bloomberg reports that sugar prices are not coming down anytime soon. The International Sugar Organization says that current surpluses are not high enough to satisfy demands of importers for stockpiling. Production costs have also risen. See “Sugar to Stay High as Surplus Not Enough to Replenish Stockpiles, ISO Says.”
CNBC reports on food inflation in the context of the typical BBQ. If your typical BBQ is a cheeseburger, baked potato, and beer, you are paying 8.4% more this year than last year.
Other points from the video on year-over-year price changes:
Ground beef up 16.7%
Sirloin steak up 6.9%
Boneless chicken breast down 4.0%
American cheese up 3.6%
Head of lettuce up 14.9%
Tomatoes down 6.5%
White bread up 8.3%
Potatoes up 21.4%
Wine up 0.4%
“Agflation” remains strong.
The price of lambs is up 58% to $2.20/pound, a record high. Wool prices are also at 20-year highs.
While demand for lamb has been strong, supply has suffered, especially amongst Australian and New Zealander farmers. In “Sheep growers benefit from low supply, high demand“, Yahoo! Finance reports through AP:
“Australia has about 70 million sheep, down from 170 million 20 years ago. The drop has been blamed on the ending of a government support program and extended drought followed by recent flooding…In New Zealand, sheep numbers have dropped from about 70 million to 40 million, and many producers have switched to dairies and beef production.”
“The campaign to be launched in 2011, titled 2+2+2= Rebuild, asks that each producer increase the size of their operation by two ewes per operation or by two ewes per 100 by 2014, increase the average birthrate per ewe to two lambs per year and increase the harvested lamb crop rate by 2 percent. This program provides an attainable, challenging, measurable and realistic plan for increasing sheep numbers in the United States and maintains jobs and infrastructure – past studies have shown that for every 1,000 head of ewes, 18 jobs are created. Importantly, the program will provide approximately 315,000 more lambs and 2 million pounds of wool for the industry to market.”
In “Amber Waves to Ivory Bolls“, the NY Times describes the general rush of farmers to plant fields of cotton in the U.S., Brazil, and other countries to take advantage of the high prices of cotton despite the high prices of other food crops. This wave could place further upward pressure on the prices of food as clothing makers win the battle for acreage.
The NYT includes a particularly poignant quote from Webb Wallace, executive director of the Cotton and Grain Producers of the Lower Rio Grande Valley:
“It’s good for the farmer, but from a humanitarian perspective it’s kind of scary…Those people in poor countries that have a hard time affording food, they’re going to be even less able to afford it now.”
It could be another year of discontent for those people whose budgets are largely consumed by the costs of food.
In “China says cannot lower guard against inflation“, Reuters reports that “China’s Premier Wen Jiabao said on Saturday inflation was affecting social stability, and taming it was a top priority for this year…The government is aiming for annual average inflation of 4 percent in 2011, higher than the 3.3 percent rise in consumer prices last year.”
The article notes several measures Chinese authorities are taking to curb inflation, everything from increasing food supplies, reducing transportation costs, and controlling the money supply and bank lending. These measures seem to be working, but the Chinese are not declaring victory just yet…
Steve Hansen at “Global Economic Intersection” presents a compelling case arguing that food prices should be included measures of core inflation (the Consumer Price Index, or CPI). Hansen simply looks at the history of the core CPI excluding food and energy versus CPI for food only versus CPI for energy only and comes to the easy conclusion that “…there is strong correlation between food price increases and the overall Consumer Price Index (CPI)…with only rare periods of exception.”
His closing remarks on the topic are a vivid reminder of one of the many reasons I care so much about “Inflation Watch”:
“Inflation is a very personal enemy for most Americans who live paycheck to paycheck. When your paycheck does not get larger, and the prices go up – you must cut something out of your life. And when Fed Chairman Bernanke says inflation is low – you know that he is addressing the segment of the population which does not live paycheck to paycheck.”
CNBC’s Lori Ann LaRocco interviewed Diane Swonk, Chief Economist at Mesirow Financial, about the status of the economy.
Swonk noted that most of her clients are worried about inflation. However, she sees inflation as a two-sided coin. On one side, inflation is squeezing producers, but companies that deal with consumers cannot pass on price increases:
“I remind [my clients] of how little pass through inflation that we have experienced in the last decade.
When I ask them how much they have passed along to consumers and you see a fairly substantial break. There are those who can pass along some of the increase in costs if their clients are other businesses. Those who deal with consumers can’t pass along the increases as easily or are paying the price in volume if they do.”
Swonk also notes that rising oil prices will be destructive for all economies. In particular, higher oil prices will further increase food prices and magnify the suffering of poorer nations, leading to yet more social unrest.
On Thursday, CNBC aired a segment on restaurant stocks, discussing the prospects for profits given rising food costs.
The December statistics from the Labor Department demonstrate the growing pressures on costs for eating establishments. The December PPI was up 1.1%. Food prices were up 0.8% primarily due to a 22.8% price hike in fresh and dry vegetables and an increase of 15.4% in the price of fresh fruits and melons.
Nation’s Restaurant News conducted a survey of restaurant operators that found that food prices will be a big issue in 2011:
- 60% expect to raise menu prices in 2011
- 5% expect to cut prices in 2011
- 39% say higher commodity costs would pose biggest challenge
The guests on the CNBC segment were a bit split on their assessments of the restaurant industry’s prospects for 2011.
Dan Popowics, Fifth Third Asset Management
- Operators will be reluctant to raise prices will look to rent or labor and hedging
- Menu prices are a last resort
Peter Sorrentino, Huntington Asset Advisors
- If operators don’t get squeezed then consumers will get squeezed
- There is not much additional room to maneuver
- Cost-cutting story is not going to work
Either way, the increasing “agflation” around the world looks ready to pinch U.S. consumers, businesses, and/or investors.
In “Food Inflation Rising as Cooking Oil Poised to Catch Grain Gains“, Bloomberg describes a world where “agflation”, my term for soaring prices in agriculture, is set to continue soaring into 2011. The extensive article focuses on the factors supporting higher prices for cooking oil, but it also presents a perfect storm for ever higher prices across the agricultural complex:
- Increasing wealth and soaring consumption in Brazil, China, and India
- Water scarcity
- Drier weather
- Increasing production of biofuels
- Investor demand in the face of low interest rates in developed economies like the U.S.
The “good news” is that agricultural prices have not quite reached the highs in 2008 that sparked riots in several countries:
“While the UN’s Food Price Index rose 23 percent in the 12 months ending in September, it’s still about 12 percent below the 2008 peak. Food security is of less concern now than in the last several years because grains stocks are bigger and a weakened global economy will stunt demand, Abdolreza Abbassian, a senior economist at the UN FAO, said last month.”
The New York Times printed a fascinating article about how South Koreans are dealing with the soaring price of their national delicacy, kimchi: “Rising Cost of Kimchi Alarms Koreans“.
South Koreans typically make kimchi from Napa cabbage, radishes, red chili peppers, garlic and salt. Unfortunately, in just the past month, the prices of several of these ingredients have soared at a rapid clip: Napa cabbage up almost 6x, radishes up almost 3x, and garlic up 2x. All this makes for a national crisis that has created a political firestorm:
“The opposition Democratic Party also has laid blame for the shortages on a large river-reclamation project, saying it destroyed farmland that would have been used for cabbages and other vegetables, a charge the government has denied.”
Despite the disruption, some apparently are going with the flow. Lee Young-ae, who runs a food stall in a large market in western Seoul offered the following observations:
“The prices will go down….Sometimes they’re high, sometimes they’re low. Easy come, easy go. That’s life.”
She should become a spokesperson for a central bank.