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…