Sunday, January 27, 2008

Here it comes...

An economy sliding into recession is a bad time for food inflation, but guess what?
"Corn is by far the most important ingredient in food rations in the production of dairy, meat and eggs," said Bill Lapp, head of Omaha-based Advanced Economic Solutions, a consulting firm that studies food prices for the food industry. "It will eventually translate into higher prices for (pork and beef) as well."

Demand for corn will continue rising in coming years, analysts say. The energy bill passed in December by the U.S. Congress will require 15 billion more gallons of ethanol from corn, driving up not just the cost of meat, dairy products and eggs, but of anything containing high fructose corn syrup. The price of the sweetener, found in everything from crackers to ketchup, has already risen to 20 cents a pound from 14 cents a pound a year ago.

The demand for corn-based ethanol has meant that farmers are devoting less land to other crops, driving down yield and increasing prices.

"It means less production of soybeans and wheat and other crops," said Westhoff. "That will affect consumers … From cereal to bread. You name it."

But the high price of corn and government mandates can't be blamed for everything.

Worldwide grain stocks are at record lows and prices at record highs, thanks to weather in Australia, Canada and Europe. Demand for dry milk has shot up because of drought in Australia, creating a much larger export market and driving up dairy prices here, from milk to cheese to ice cream.

"It's a lot more complicated than ethanol means higher prices," Westhoff said.

And it's not just an American issue. Growing demand for food, higher energy and fuel costs, and lower grain stocks have conspired to drive up food prices as much as 37 percent worldwide, according to a United Nations food price index.

Some analysts believe the picture is not likely to improve soon. "I think the coming years are going to be very challenging from a food inflation standpoint," said Lapp. He believes the Consumer Price Index could increase by 6 or 7 percent in 2008, compared with 4.8 percent last year. [More]
While an earlier study seems to shift the blame largely to oil prices, I think feed prices simply hadn't had a chance to work through the food chain. In fact, a period of herd liquidation could actually lower meat costs as livestock operators bail out. If oil prices plateau or slide and food inflation continues, which I think is possible, it becomes a tougher argument to make - and almost impossible to sell to a hog producer, for example.

Consumers have been slow to pick up on the increases, but the early warning sign of egg prices is now being followed by healthy increases in other foods. Between animal welfare-prompted production practices and high feed prices, egg producers as not expanding even as eggs become more popular in the kitchen.

And the problem is worldwide, and is exacerbated by the confluence of other trends as well.
But a thoughtful new paper from UK-based consultants Bidwells Agribusiness suggests something else is driving global food prices higher - namely an ever more pressing world-wide shortage of both fresh water and arable land.

In other words, the current food "cycle" could either be huge - with sky-high prices around for much longer than is often assumed. Or it may even be that natural limits on farm production, combined with a rapidly expanding world population, mean prices are now permanently - or "structurally" - higher. [More]
We're going to need another justification than "cheap food" to continue our subsidies with farm income for many growers at record levels. When disposable income stagnates with slow growth, our oft-repeated statistic about "less of their income" could shoot up significantly, revealing it is 90% about income and 10% about commodity prices.

Grain farmers are also going to have to contend with increasingly restive livestock producers.

I think payment limits and means-testing would be a strategic compromise to consider right now. Ya gotta know when to fold 'em.

No comments: