Inflation's Early Warning System: Crude Foodstuffs and Feedstuffs
Keith Hazelton
June 24, 2007
Red lights are blinking on inflation's early warning system control panel – fasten your seat belts. “Crude Foodstuffs and Feedstuffs,” commodities such as grains, raw milk, sugar and slaughter animals making up the raw materials that eventually become the finished products we call “food,” registered an unadjusted 35 percent year-over-year increase in the May Producer Price Index reported June 14th. Its five-month annualized increase is nearly 22%.
Extremely sensitive, and thus extremely volatile, the commodities component of PPI nonetheless is a credible harbinger of future inflation, and by extension, long opportunities in a bullish commodities market, as previous periods of rapid raw materials inflation since the 1970s has shown.
For reference, a table of Crude Foodstuffs & Feedstuffs is linked here. Note the lengthy month-to-month periods of price inflation over the last 35 years, including 1971-1974 (Nixon/Burns “Wage and Price Controls”), 1975-1976 (Ford/Greenspan “Whip Inflation Now”), 1978-1981 (Carter/Volker “Malaise”), 1987-1989 (Bush/Greenspan “No New Taxes”) and 1995-1996 (Clinton/Greenspan “Last Great Bull Market in Grains Until Now”).
While the Federal Reserve monitors “core” inflation rates (inflation less food and energy), from which it divines the direction of interest rates, its exclusion of food and energy gives, at best, an incomplete picture of monetary inflation, and, at worst, a grossly distorted view of what most Americans intuitively sense at grocery stores and gas stations.
So last week, when the Bureau of Labor Statistics reported May PPI up 0.9 percent, but up only 0.2 percent ex-food-and-energy, and the May Consumer Price Index up 0.7 percent/up 0.1 percent ex-food-and-energy, financial markets focused on the all-is-well “core” rates. American consumers, however, who cannot eat or drive with “core” goods, already know the real inflation story and are beginning to make personal economic adjustments to compensate, which, if that translates to lower consumption, is not good for an expanding economy.
Chief among the causes of edible raw material inflation is rising energy costs. Farmers and ranchers are paying much higher prices not only for fuel to plant and harvest crops and to raise slaughter animals, but also for feed, fertilizer and pesticide.
Other factors always influence short-term movement of commodity prices, including weather, water, crop mixes and global grain supplies on hand, but longer-term price movements now are being impacted most by a surge in worldwide demand.
Like energy, the world's demand for food is increasing exponentially as a function of both population growth and intensified slaughter-animal production to support a trend toward North-American-style meat-based diets, which convert roughly 3-7 pounds of grain into each pound of meat.
Furthering grain demand is America's new desire for corn ethanol, which myopically is diverting food supplies to biofuel in in hope it will become some sort of scalable alternative to petroleum-based auto fuel. A near-record US planting of more than 90 million acres of corn this spring evidences the renewed profitability of this crop, while Mexican farmers are burning blue agave fields, which yield the key ingredient in tequila, to replant their fields with corn. (Bueno para tortillas, pero muy mal para margaritas. Ole.)
As it is, global grain production has fallen short of demand seven of the last eight years, more than halving grain days-on-hand to the 2007/2008 estimate of 53 days from 115 in 1999/2000, the lowest level since the US Department of Agriculture began tracking these data nearly 50 years ago.
The picture is no less bleak, no less inflationary, in the world's oceans, where a third of fishing grounds are thought to be “in collapse,” and possibly two-thirds in less than two decades, at which time global population may exceed eight billion, up from 6.7 billion today.
It's said on Wall Street the most dangerous words are “but this time it's different,” which invariably holds true until it doesn't. This time it is different.
Energy prices will remain at new lofty plateaus from a combination of worldwide demand growth, Middle East instability, static refinery capacity, growing extraction costs, the possibility of peaking production from the world's major oil fields and, at least at present, a seeming unwillingness on the part of US drivers, who consume 25 percent of the world's energy, to modify their consumption.
Food prices, incorporating rising energy prices and other environmental and demand factors, also are likely to remain in an uptrend which could last, based on historical trends, several years or more. Like energy, we may have seen the last of foodstuffs inflation/deflation cycles which has brought this volatile sector back to 1982 levels (1982=100) a number of times in the last several decades, including as recently as November 2002 in the aftermath of 9/11.
At an index level of 146.4 in May 2007, foodstuffs now are inflating at about 10 percent a year since late 2002.
Not to worry – too much. Prices of flat panel HD televisions, gas-guzzling cars, roofing nails, computers, incandescent light bulbs and, likely, housing prices will continue to deflate or at least stabilize.
But - and there's always a “but” - foodstuffs and feedstuffs inflation is the bearer of bad tidings of rising producer and consumer inflation and, perhaps, a faltering economy. If so, welcome to the new millennium's version of that 70s show: “stagflation,” with attendant opportunities for commodity profits.
Extremely sensitive, and thus extremely volatile, the commodities component of PPI nonetheless is a credible harbinger of future inflation, and by extension, long opportunities in a bullish commodities market, as previous periods of rapid raw materials inflation since the 1970s has shown.
For reference, a table of Crude Foodstuffs & Feedstuffs is linked here. Note the lengthy month-to-month periods of price inflation over the last 35 years, including 1971-1974 (Nixon/Burns “Wage and Price Controls”), 1975-1976 (Ford/Greenspan “Whip Inflation Now”), 1978-1981 (Carter/Volker “Malaise”), 1987-1989 (Bush/Greenspan “No New Taxes”) and 1995-1996 (Clinton/Greenspan “Last Great Bull Market in Grains Until Now”).
While the Federal Reserve monitors “core” inflation rates (inflation less food and energy), from which it divines the direction of interest rates, its exclusion of food and energy gives, at best, an incomplete picture of monetary inflation, and, at worst, a grossly distorted view of what most Americans intuitively sense at grocery stores and gas stations.
So last week, when the Bureau of Labor Statistics reported May PPI up 0.9 percent, but up only 0.2 percent ex-food-and-energy, and the May Consumer Price Index up 0.7 percent/up 0.1 percent ex-food-and-energy, financial markets focused on the all-is-well “core” rates. American consumers, however, who cannot eat or drive with “core” goods, already know the real inflation story and are beginning to make personal economic adjustments to compensate, which, if that translates to lower consumption, is not good for an expanding economy.
Chief among the causes of edible raw material inflation is rising energy costs. Farmers and ranchers are paying much higher prices not only for fuel to plant and harvest crops and to raise slaughter animals, but also for feed, fertilizer and pesticide.
Other factors always influence short-term movement of commodity prices, including weather, water, crop mixes and global grain supplies on hand, but longer-term price movements now are being impacted most by a surge in worldwide demand.
Like energy, the world's demand for food is increasing exponentially as a function of both population growth and intensified slaughter-animal production to support a trend toward North-American-style meat-based diets, which convert roughly 3-7 pounds of grain into each pound of meat.
Furthering grain demand is America's new desire for corn ethanol, which myopically is diverting food supplies to biofuel in in hope it will become some sort of scalable alternative to petroleum-based auto fuel. A near-record US planting of more than 90 million acres of corn this spring evidences the renewed profitability of this crop, while Mexican farmers are burning blue agave fields, which yield the key ingredient in tequila, to replant their fields with corn. (Bueno para tortillas, pero muy mal para margaritas. Ole.)
As it is, global grain production has fallen short of demand seven of the last eight years, more than halving grain days-on-hand to the 2007/2008 estimate of 53 days from 115 in 1999/2000, the lowest level since the US Department of Agriculture began tracking these data nearly 50 years ago.
The picture is no less bleak, no less inflationary, in the world's oceans, where a third of fishing grounds are thought to be “in collapse,” and possibly two-thirds in less than two decades, at which time global population may exceed eight billion, up from 6.7 billion today.
It's said on Wall Street the most dangerous words are “but this time it's different,” which invariably holds true until it doesn't. This time it is different.
Energy prices will remain at new lofty plateaus from a combination of worldwide demand growth, Middle East instability, static refinery capacity, growing extraction costs, the possibility of peaking production from the world's major oil fields and, at least at present, a seeming unwillingness on the part of US drivers, who consume 25 percent of the world's energy, to modify their consumption.
Food prices, incorporating rising energy prices and other environmental and demand factors, also are likely to remain in an uptrend which could last, based on historical trends, several years or more. Like energy, we may have seen the last of foodstuffs inflation/deflation cycles which has brought this volatile sector back to 1982 levels (1982=100) a number of times in the last several decades, including as recently as November 2002 in the aftermath of 9/11.
At an index level of 146.4 in May 2007, foodstuffs now are inflating at about 10 percent a year since late 2002.
Not to worry – too much. Prices of flat panel HD televisions, gas-guzzling cars, roofing nails, computers, incandescent light bulbs and, likely, housing prices will continue to deflate or at least stabilize.
But - and there's always a “but” - foodstuffs and feedstuffs inflation is the bearer of bad tidings of rising producer and consumer inflation and, perhaps, a faltering economy. If so, welcome to the new millennium's version of that 70s show: “stagflation,” with attendant opportunities for commodity profits.
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