HardAssetsInvestor

Written by Julian Murdoch  |

April 07, 2008

Guns Vs. Butter: Butter Wins

Details

The food inflation problem is only getting worse, and the problem's worst overseas.

• The Bad News stats
• Is agflation here to stay?
• International trade: crazyland

In the spirit of quarterly updates, it's time to take another look at food prices. When we last checked in with the supermarket - right after the New Year - we expressed shock and dismay at the rise in staples like eggs and milk. I mean, eggs had risen 38% in just 15 months! Imagine!

Of course, that ain't nothin' compared with the last few months.

Food prices are rising everywhere - which comes as no surprise to anyone following agricultural commodities. The past few months have seen "beans in the teens" and wheat over $12 a bushel. Corn hit $6 a bushel last week and rice is up over $20. With all of these commodities at or near record highs, food producers have no choice but to pass along their rising costs to the consumer.

Behind the prices are the usual suspects. As always, it's supply and demand. Increased wealth in developing nations like China and India translates into higher consumption of meat, grains and wheat. The growing popularity of biofuels to offset energy costs and global warming sets up the competition between crops for food and crops for energy production. Global stockpiles of most grains are at all-time lows, supporting the higher prices. And supply hasn't been rosy either: half the world seems to be suffering from droughts, which cuts harvest yields, and the other half is dealing with the opposite problem - Bangladesh is still reeling from floods and typhoons, and rain could delay corn plantings here in the U.S.

And of course, there's always oil. Agriculture and crude oil go hand in hand, with high oil prices translating into higher transportation and fertilizer costs. And where do the effects of all these trends ultimately have an impact? Your grocery cart.

At Home ...

Here in the U.S., an informal survey conducted by the American Farm Bureau every quarter, shows a basket of 16 common grocery items increasing 8% between the fourth quarter of 2007 and the first quarter of 2008.

The media is full of stories of how Americans across the country are dealing with higher grocery bills - from shopping at discount grocers (Wal-Mart looks like a big winner here) to clipping coupons, to eating less meat. American consumers are feeling the pinch of higher food prices.

... and Abroad

From a GDP perspective, the U.S. has it easy in weathering food inflation. Food is only 7% of overall economic consumption. But in Asian economies like China, India and Vietnam, food costs account for anywhere between 30­‒50% of overall consumption. Every uptick in food prices has a vastly more significant effect on local economies than here at home. United Nations records show global food prices rising 35% in the past year, with grain up 42% and dairy up a Marge-let's-buy-a-cow, eye-popping 80%. The world's poorest countries are facing very real fears of food shortages, and even the not-so-poor are acting to ensure food supplies and attempt to rein in food inflation.