Energy Affecting Food Prices

Nearly every food staple has seen double-digit price increases over the past year, some of it due to skyrocketing energy costs. People are Squeezed by Rising Food Costs.

The cost of food has become a headline story the world over, from food-related riots in Haiti and Egypt to some Asian governments mulling whether to restrict rice exports. In the U.S., grocery bills are surging: Nearly every food staple has seen a double-digit percentage increase over the past year, including a 38% hike for a dozen eggs, to $2.16, and a 19% jump, to $1.78, for a loaf of white bread, according to American Farm Bureau data. With Americans spending 15% of their household income on food and drinks, rising prices in the grocery aisles have spurred consumers to hunt savings. Of that spending, only half goes to grocery stores, with restaurants collecting the rest.

The price tally in the latest American Farm Bureau market basket survey of 16 basic groceries was $45.03 in the first quarter, up 9% from the same period last year. Many of the price increases are eye-popping—a five-pound bag of flour cost $2.69, 26% more than last year.

The surge in food costs has been attributed to several factors, including the increasing number of American farmers who now grow corn to supply the ethanol industry instead of food companies. In turn, they have reduced the amount of land farmed for wheat and soybeans, leading to a huge strain on food processors such as ConAgra Foods (CAG), Kraft Foods (KFT), General Mills (GIS), and Kellogg (K).

Strain Or A Gain?

Was that a strain or a gain? Inquiring minds demand a closer a look.

Conagra Daily Chart



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Kraft Daily Chart



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General Mills Daily Chart



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Breakfast of Champions

The charts suggest that General Mills (GIS))is able to pass on increases far better than Conagra (CAG) or Kraft (KFT). Please consider this press release: General Mills Reports Strong Growth in Fiscal 2008 Third Quarter.

General Mills today reported results for the third quarter of fiscal 2008. Net sales for the 13 weeks ended Feb. 24, 2008, rose 12 percent to $3.41 billion, fueled by 6 percent pound volume growth. Gross margin expanded to 39.8 percent of sales, as mark-to-market valuation of commodity positions, productivity and pricing offset significantly higher input costs.

Chief Executive Officer Ken Powell said, "This was a terrific quarter for General Mills, fueled by continued strong demand for our products in markets all around the world." Each of the company's business segments reported net sales and operating profit growth for the quarter. These gains came on top of good growth in last year's third quarter, when General Mills' net sales grew 6 percent and earnings per share rose 9 percent.
Where is the Strain?

The strain is not on General Mills. The strain is on consumer pocketbooks.

Energy and food are two places where rising producer costs are passed on to the consumer. Some people mistake this for inflation. It's not inflation.

Unless there is an increase in money supply and credit, what goes up somewhere must go down somewhere else. This is simple arithmetic and it's amazing how few get it. Credit (marked to market is contracting rapidly). Money supply, measured accurately, is barely moving. Therefore, what goes up somewhere is falling somewhere else.

What's going down is home prices, car prices, and prices of damn near anything produced by China and sold at WalMart.

For a discussion of this idea, please see Why Do Oil Prices Keep Rising?

However, people do not buy homes, computers, and TVs every week. People do buy gasoline and food every week. So people are screaming about what they see because they buy it every week. What people want is for home prices to rise and the price of food to sink. The market only accommodates such fantasies for a short time. If anything, the market accommodated that fantasy far too long.

Fantasy time is over and reality is now setting in. Here is the reality: Prices of things we absolutely need are rising (food and energy). Prices of things consumers are stuck with (houses and stocks, the latter via 401Ks and company options) are falling. This can go on longer than anyone thinks.

Comments

[Solar Guy]

President Bush sure got some lousy counsel from his staff on the whole mandated use of ethanol and subsidy issue. What a debacle that is turning out to be as it drives up food prices and is not the renewable energy solution he was told it is. Now who in his administration has the courage to tell him it was a huge mistake?

[Tradewolf]

First of all, you along with most people are sadly in error. The bulk of the alternative ethanol program has not even begun yet. ETOH is only being mixed with gasoline in 10-15% or less on average amounts.

It is an additive, not an alternative. Most of the fuel is still gasoline. Ethanol has replaced MBTE a carcinogen, which replaced TetraEthyl Lead another health hazard. What do you want them to use? Take your pick, Lead, MBTE and its carcinogen and water polution issues, or biodegradable ethanol. You have to have one of them for octane improving, pre-ignition detonation prevention and oxygenation for complete fuel burning according to the EPA. If you want the demand to drop on Ethanol for fuel then we can go back to Leaded gas which is the least evil octane improver other than Ethanol.

Now if the Ethanol program gets off the ground and we see large numbers of E85 cars on the road, then you will see big demand and corn prices would go through the roof, smae as any commodity when demand skyrockets, but WE ARE NOT THERE YET. I do not think we will see that happen as I think the popularity of E85 will not happen due to price self limiting. Do not blame all the food cost increase all on Ethanol which is a great fuel *additive*. Blame it on commoditization of everything which is a global neccessity and the speculators parking all their money fleeing from the dollar into them.

They have made these commodities true alternative hard currencies and this will not change unless the speculative money runs back to dollars or the market. Or if there are price controls which are already happening world wide. Remember that once some countries opt for price control this will radically skew the global demand/supply situation elsewhere forcing all to adopt them. All of this will not occur in areas where the commodity is not a life or death demand issue, but where it is look out.

This bubble will burst but before it does a lot of people are going to be hurt or die. These commodity bubbles take the stairs up and the elevator down. Oil and Food speculation can bring the economy of the world to a severe depression a lot worse than some Wall St. mortgage bankers and hedge funds folding. Bernanke should never have dropped the rates unless it was agreed by all nations to do the same but he did and he has destroyed the dollar. This has caused the whole cycle above. He must raise interest rates to 5% prime immediately. This is the only thing that will bring the strength back to the dollar so that we see dollar euro 1:1 again. Watch what happens to oil and corn prices then.

[Sir Sid]

It is amazing to me how people can rationalize THEFT! Oil and gas prices are what ails the economy and they must come down!!! The people who are hurt the most are our retirees on fixed incomes and the poor. Interest rates are right where they need to be. The U.S. does not need to go back to a tight money policy at least not for now. And.. we do not need to increase the supply of money.

By the same token, price controls on gas and food would be a disaster. Further governmental regulation would screw things up worse than they already are unless.... they force the oil companies (and OPEC) to increase their output and keep further regulation and taxation out of the mix. Government MUST also reduce taxation on every product for sale and permanently remove tax from individual income and gasoline. I would also advocate some sort of a tax incentive for the development of solar and hydrogen power. These are the things that the government could do if they REALLY wanted to do something productive (for a "change")!!

[your_avid_investor]

There is doubt that due to speculative money, commodity prices can become artificial. But only to some extent. Recent gasoline and crude oil inventory numbers came in well below expectations. Unless production is increased this trend will continue. Based on such figures, one has to assume that the global (and US) demand side "stories" are true. Even on the supply side, there is only that much room for speculation before one hits sobering numbers and on production/output.

[your_avid_investor]

Correction: There is no doubt ... (see above)

[nick gogerty]

Raw materials are small component of total FMCG costs. they do hurt margins in the short term, until consumers get hit. The New York foodbank is at 25 years lows. People are hurting. Here is a video from reuters.
nickgogerty.typepad.co...

[Ron2008]

"Recent gasoline and crude oil inventory numbers came in well below expectations. Unless production is increased this trend will continue. Based on such figures, one has to assume that the global (and US) demand side "stories" are true."

Gasoline inventories came in low because,
1. It is normal for inventories to decrease at this time of year.
2. Gasoline inventories are the highest since 1999.
3. Refiners are making less because of high inventories and less demand.

Crude came in low because,
1. nobody, except the US gov, builds inventory when prices are at record highs.
2. With lower refinery usage, there is less need for crude.
3. Weather affecting imports. Mexican ports were closed.

Right now there isn't a shortage here. OPEC is correct.