Who Is Benefiting From High Commodity Prices?

Consumer spending increased 0.4% today, giving the markets cheer, although after taking inflation into account, it is only a 0.1% increase. Credit card companies like Visa (V) and Mastercard (MA) already gave us a preview to that, showing how credit card spending in the US had increased in the last quarter. Also, how many of us truly believe inflation is at only 2.6%? If it’s more than that, then inflation-adjusted consumer spending would have declined considerably. This is also what the credit card companies noticed, that spending moved to essentials such as food and gas, which would explain why the US manufacturing index shrank for a third straight month.

So who is benefiting from the high commodity prices? Credit card companies definitely are, and gas companies should be. Exxon Mobil (XOM) reported a 17% increase in Q1 profit on net income of $10.9 billion, or $2.03 per share, from $9.28 billion, or $1.62 per share last Q1. Although this may seem good, it was lagging behind Shell’s (RDS) 25% and BP’s (BP) 63% profit increase, and almost 10 cents below what analysts had expected.

It seems Exxon was unable to take full advantage of the higher oil prices due to several reasons: Its oil wells produced less output, gasoline prices increased more slowly than crude oil, squeezing its refineries of profit margins, and foreign governments demanded a bigger share of revenue from higher oil prices.

And talking about government intervention in oil prices, it is interesting to note that a gallon of gasoline costs around $0.12 in Venezuela, $0.45 in Saudi Arabia, $3.45 in the US, and around $8 in much of Europe. Many things play a role in that, namely the taxation or subsidy level each government applies to gasoline.

You’d think farmers would also be benefiting from the higher food prices, but many of them say they are suffering from higher fuel prices and the fact that it is harder for them to hedge their food prices on the futures market as the futures price is so much higher than the cash price, and the prices don’t converge close to the futures contract expiry date as they normally would. If that’s the case, it could support arguments that a lot of the rise in food prices is due to speculation.

So yes, spending is up, but people are getting a lot less for their money, and that means “real” inflation is probably a lot higher than the 2.6% estimate. And who is benefiting from the high commodity prices? Mainly foreign governments in the Middle East and other oil producing nations like Venezuela (many who have questionable human rights records), and traders who saw this coming and were generally long commodities.

Comments

[DanielJacome]

wheat has pulled back hard, owning PNRA here after recent surprise and solid guidance

[odin]

Isnt the picture more nuanced than that in the credit card space?

If inflation spikes and the economic picture worsens, the transaction processors (MA, V) may benefit in the short run, but that is only fuelled by the fact that the banks who issue the credit are willing. When the chickens of delinquency come home to roost under a prolonged downturn, its hard to see how they will benefit.

Under an inflationary environment, creditors usually suffer, debtors paying with cheaper money benefit.

But its not clear to me that we can paint this as an inflationary environment with one brush. Its clear that cons staples (due to both supply/demand and speculation) will continue to face inflationary pressures (even after today's pullback). Its not clear whether durables are undergoing deflation.