Inflation is measured many ways. Government reports will talk about core inflation, inflation excluding food and energy, consumer price index, producer price index and so on. These measurements all exist in the academic world. Talking heads argue about it on TV. Real inflation, inflation that is felt throughout the world, is food inflation. Food inflation is here, it’s real and it’s here to stay.
The Food and Agriculture Organization in Rome tracks a basket of 55 commodities to measure global food prices. This month, it topped the June ’08 high due to regional production issues. Many domestic commodity markets are substantially below their ’08 highs. Remember $8 corn and $16 dollar soybeans? Lets not forget the input cost of $140 crude oil. The only reason prices didn’t sky rocket even more in 2008 is because the world was still reeling from economic meltdown. Savings rates were increasing and spending was declining. This kept fundamental demand in check. The 2008 rally was fueled by poorly timed commodity index fund buying coupled with rising fuel and fertilizer costs.
The commodity index funds were created to capitalize on the growing appetites of emerging markets. As foreign markets mature, their tastes will include a more western diet, which is heavily based on grain and meat consumption. For example, total United States meat consumption is approximately 250 pounds per person per year. China’s total meat consumption has nearly doubled in the last 10 years and is now around 100 pounds per person per year. This is still less than half of our consumption. Their population, which is four times larger than our own, could double their consumption again and still be below the average American’s.
The example above also translates into the grain markets. Think of soybeans in terms of vegetable oils and think of corn to feed the livestock. The USDA released their annual crop production report this week as well as their supply and demand reports. The United States planted and harvested more acreage than last year in corn and beans. The bean harvest was the second highest on record and rice did set a new record. Historically, these numbers would be seen as very bearish for the markets since they point to greater supply. However, looking deeper, we can see that ending stocks are near all time lows, which indicates exceptionally strong demand given the generous supply for 2010.
Food prices are beginning to soar. Just as decent nutrition is the most basic of luxuries in a developing economy, so is it the most primal of necessities. We are already seeing riots in many third world countries over the price of sugar and grains. Developing nations are faced with a two-headed monster of rising food costs in the open market as well as food that is moving to the black market. President Clinton’s primary focus in Rwanda was to safely transport food aid past the warlords and to the people. Algeria, Haiti, Bangladesh, Senegal and Indonesia have all experienced civil unrest due to rising food prices just in the last week. It is much more difficult to contract one’s appetite than it is to expand it. Any planting issues in the U.S. this spring would douse the global embers of unrest with gasoline.
The United States is responsible for nearly 40% of the world’s soybean production and approximately 70% of its corn. These are the staples that feed the world’s people and its livestock. Our crops yield five times the global average. The U.S. will export our agricultural intellectual property as Brazil, Russia and the Ukraine expect to grow their output by 30% over the next ten years. Fertilizer, seed companies and biogenetic engineering will become the next wave of global financial players as mother Earth prepares to deal with the strain of a swelling and hungry population.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.