The recent run-up in wheat prices to their highest level in almost two years highlights the growing problem of food inflation here in the United States and around the world. The global grain market is a fragile thing, like most food markets. A major disruption anywhere has the potential to send prices soaring, cause governments to start hoarding their supplies, and even lead to riots.
Wheat futures prices closed above $8 per bushel on the Chicago Board of Trade earlier this month, the highest settlement price for a most-active contract since August 2008, after Russia placed a temporary ban on grain exports in the face of a devastating drought.
That’s a price spike of nearly 70% in two months.
The move then spilled over into other grains. Corn and soybeans remain at more than 10% above their mid-June levels.
The price action in wheat has “moved the entire global grain market to higher prices,” Ned Schmidt, editor of the Agri-Food Value View said in his latest report. “If those using wheat as animal feed, particularly in Russia, are unable to obtain wheat, they will utilize some other grain. That shift to other grains will push up those prices.”
And while the drought in Russia and the surrounding region is the “catalyst” for the higher grain prices, it’s not the “cause,” he said.
The “real cause … is [the] world’s just-in-time inventory approach to Agri-Food,” he said, referring to agricultural foods which include grains and meats.
The global food crisis of 2007-2008, a time when food prices surged and grain prices reached record highs, is a good example of that. The food crisis was “a warning, not a one-off event,” said Chris Mayer, contributor to The Daily Reckoning and editor of Capital and Crisis.
“It was a warning telling us how fragile the food supply system is,” he said.
Third World governments should prepare for food riots
Earlier this month, wheat prices hit $7.25 a bushel, a 71% increase since the June low. It’s the biggest one-month jump in three decades. The last time prices got this high was during the food crisis in 2008. (Wheat prices topped out at $13 then.) You may recall the ensuing food riots across the globe from Haiti to Egypt to Bangladesh.
In 1972, Russia’s wheat crop failed. Russia had to dip into the global grain markets to meet demand. Before Washington knew the plight of its Cold War adversary, Russia bought up all of the surplus wheat in the US. Dubbed “The Great Grain Robbery,” Russia’s purchases sent grain prices soaring around the world.
Grain prices soon hit 125-year highs in Chicago. In a 10-month span, soybeans went from $3.31 to $12.90 a bushel. Food prices around the world rose 50% in 1973.
Russia’s crop failure comes at a bad time. Most of the world’s wheat exporters are having problems. The Aussies battle locusts. The Canadians suffer from too much rain. Even European farmers struggle with drought. The Italians’ beloved tomato crop will come up 10-15% short this year. Belgian potato farmers say drought will nick their yields. Polish fruit orchards will be down by a fifth. The French wheat farmers curse the skies as their wheat fields shrivel in the sun. The English sheep farmers, short on hay and grass, have sold their flocks early. Even the Dutch expect 10% fewer tulip bulbs this year.
The market is tightening and there are ripple effects across the globe.
U.S. Food Inflation Spiraling Out of Control
The National Inflation Association (NIA) today issued the following food inflation alert to its http://inflation.us members:
The Bureau of Labor Statistics (BLS) today released their Producer Price Index (PPI) report for March 2010 and the latest numbers are shocking. Food prices for the month rose by 2.4%, its sixth consecutive monthly increase and the largest jump in over 26 years. NIA believes that a major breakout in food inflation could be imminent, similar to what is currently being experienced in India.
Some of the startling food price increases on a year-over-year basis include, fresh and dry vegetables up 56.1%, fresh fruits and melons up 28.8%, eggs for fresh use up 33.6%, pork up 19.1%, beef and veal up 10.7% and dairy products up 9.7%. OnOctober 30th, 2009, NIA predicted that inflation would appear next in food and agriculture, but we never anticipated that it would spiral so far out of control this quickly.
Food inflation will accelerate to a 5 percent annual rate by December and average as much as 4 percent in 2010, topping government forecasts as meat and dairy costs jump, said William Lapp, a food and agricultural economist.
“There are more costs to be pushed through the system,” Lapp said today at an agricultural symposium in Kansas City, Missouri, sponsored by the Federal Reserve. “The consumer has not seen all the increases yet.”
However, according to the NIA we are heading into a hyperinflationary crisis:
NIA considers the number one catalyst to the upcoming hyperinflationary crisis to be our nation’s out of control budget deficits and the Federal Reserve’s need to monetize them. The White House is not projecting the U.S. to have a balanced budget ever again. In order to reduce our budget deficit from $1.56 trillion this year to $752 billion in 2015, the White House is projecting an average GDP (gross domestic product) growth rate of 5.58% over the next five years.
“The Federal Reserve is likely to pull out all the stops to stimulate expansion of the money supply until the U.S. has a real annual price inflation rate of between 15% and 20%. Their hope is that with this rate of price inflation, our deficits and debts will be slowly eaten away without a complete loss of confidence in the U.S. dollar.”
Walmart Is Quietly Raising Prices – Up to 60% – the rising prices are found throughout the store. Groceries, laundry and cleaning supplies have all been affected by the major price hikes. For example, 32oz bottles of Windex shot up 50%, 12 oz box of Quaker oaks went up 65%, and 50oz Tide went up more than 50%.
So what are the effects of all this? Expect ripples across the food chain. Prices for everything will rise. Prices for cocoa, coffee and pork bellies have already gone up. Beer brewers will pay more for barley, as the barley crop will be down by 20%. All flour-related products – breads, biscuits and the like – will be more costly. As The Financial Times reported, “Food executives are also warning about surging prices for feeding and malting barley, which could push higher the retail cost of products from poultry to beer.”
How will this go over with the already rattled consumer in a fragile recovery? Many companies seem reluctant to raise prices. As Domino’s CEO said, “Consumers are still hurting out there.” Many companies hedge their exposure to food commodities, but if these prices continue to climb, it could crimp their bottom lines.
Meanwhile, the fertilizer stocks have rallied. From July 6 lows, PotashCorp (NYSE:POT) shares are up 34% and Mosaic (NYSE:MOS) is up 31%. The logic is simple enough. High grain prices inspire more planting. More planting means more fertilizer use. Already, as we’ve seen, volumes are snapping back in the fertilizer business. In their last quarterly reports, both Potash and Mosaic doubled their profits from a year ago.
Recent events show you, once again, the challenges in meeting the world’s demand for food. The food crisis of 2007-2008 was not a one-off event. It was a warning. And today, we see again how quickly and easily we can get to another food crisis.
- Watch – The World According to Monsanto (morichesdaily.com)
- St. Louis Fed Chief warns of the Seven Faces of ”The Peril” (morichesdaily.com)