The Bureau of Labor Statistics reported that while producer prices have just begun to moderate, consumer price inflation stands at a seasonally adjusted annual rate of 3.7 percent, its highest rate since October 2008. The key drivers of these spiraling costs are rising food and energy prices. The gasoline index has increased by 32.4 percent in the last 12 months and food inflation is running at about 4.4 percent during the same period.
Looking at this month's producer price report, prices for crude foodstuffs and feedstuffs rose by 4.7% in August, mostly driven by a 9.2 percent increase in the corn index. High corn prices encourage farmers to maximize yields and corn needs varying degrees of nitrogen, phosphate and potash depending on the soil. This benefits fertilizer companies such as CF industries (NYSE:CF), Mosaic (NYSE:MOS) and Potash ( POT ), all of whom recently reported strong earnings.
In January of this year I wrote about how downstream producers were not able to pass their input cost increases further downstream in an article entitled, "Producer Prices Rise at Highest Monthly Rate Since January 2010". Durable goods manufacturers actually fared the worst, not only unable to pass on higher materials prices over the last six months of 2010, but having to offer even more discounts to move merchandise.
Over the last six months price inflation for crude foodstuffs and feedstuffs have moderated considerably, falling to 5.4 percent in the most recent 6 months from the 15.3 percent increase in the last six months of 2010. As is illustrated in the first chart below, producers of food semi-products have recently been able to pass on roughly 64 percent of their cost increases for raw materials versus only 34 percent in the last half of 2010.
In January I wrote in "Consumer Price Increases Being Absorbed by Retailers, For How Long?" that in the last half of 2010 sellers to consumers of food items were only able to pass on about 26 percent of the higher prices they paid for the goods. That has changed in the last six months. Producers of finished consumer foods are now the firms feeling the pinch as their margins have compressed the most due to only being able to pass on about 33 percent of any increases in the prices of their input materials. Retailers and firms selling to business end users can finally pass on all of their wholesale price increases as we witness consumer prices paid outpace price increases received by the producers of those finished goods.
(Click charts to expand)
Non-food goods showed an even more dramatic fall in prices. Crude materials prices have actually declined over the last six months, falling 6.3 percent. On the durable goods side, producers of semi-products as well as sellers to consumers and business end users were able to get higher prices and restore at least some of their margins due to the huge drop in the prices of crude materials.
The non-durable consumer staples value chain saw producers of semi-products enjoy receiving a full 5.3 percent increase in prices received during the most recent 6 months while in their input costs declined, their customers, the producers of finished goods did not fare as well as they were only able to pass on a meager 7 percent of the higher prices paid for their manufacturing inputs. Sellers to consumers and business end users fared best being able to pass through all the higher prices paid and then some.
Finished goods producers were once again caught in the squeeze play, with those producing non-durable goods only able to pass on 7 percent of cost increases. Durable goods producers fared better, able to pass on about 86 percent of their rising input costs.
The drop in producer prices of non food durable goods is in response to a contraction in new orders amid rising inventories. The August ISM new orders index has been below 52.1 since May. Any number below 52.1 is generally consistent with a contraction in the Census Bureau's series on manufacturing orders. Production of non-durable goods is beginning to flatten out while inventories begin declining. These actions are all consistent with industry preparing to reduce backlogs with inventory rather than production as we move toward recession.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.