Many of you have noticed how much more we are spending on food today. It seems like everywhere you look and go, it costs more to travel and eat. There are a number of factors affecting the price of food today. I thought I should take a moment to explain a few of them. Much of our food supply is a global commodity. That means what happens around the world today can affect how much a gallon of milk costs tomorrow. Corn, wheat, oils, sugar, cocoa, coffee, dairy, etc are all traded on a global marketplace.
Supply & Demand: Because much of our food is a derivative of crops, for example BBQ sauce likely has corn syrup as a major ingredient and is made from corn, therefore the price of that finished product is heavily dependent on the supply and demand of corn. Presently many agricultural commodities are in short supply and high demand. Weather can destroy a season’s crop yield (supply) and China’s increasing middle class has more mouths to feed and more money to spend (demand) – to provide a simple example. Weather has been terrible this year across the globe: Freezes in Mexico, wildfires and droughts in Russia, floods in US and Australia, natural disasters, and the list goes on. Demand is way up as people/countries are stock piling food: Russia ban on wheat exports to protect their domestic supply, China purchased 1/3 of the pecan supply to ensure adequate domestic supply, to name a few. All of this affect us the consumer simply trying to purchase a loaf of bread at their local bakery or grocery.
Wall St.: Virtually everything today is traded on the world markets. People invest their money and other people’s money in all sorts of things: stocks, bonds, commodities, currencies, etc. Because of the lethargic economy right now, there aren’t many places to put your money for great returns. How much is your bank’s saving account yielding you currently- 0.5% ? What if I told you the price of coffee was going to double next month – would you buy some coffee ‘stock’ today? Sure. Well, when crops are destroyed or governments ban exports, the markets react. This is called “Speculation”. You may remember it from the Housing Crisis of 2008. People ‘speculated’ that the price of their home was going to double each year. Right now food costs are subject to extreme volatility due to market speculation – “we think the price is going to go up tomorrow”.
Transportation: this is an easy one. Today it costs more for you to fill up your car at the pump right? Well it costs more to fill up planes, trains, ships and trucks as well. This means that it costs substantially more for Brazilian sugar cane to be transported to Chicago. This is one of the many reasons people are into buying ‘local’ and ‘locally sourced’ foods now-a-days. It’s cheaper, more sustainable economically and environmentally and it’s better for your local economy. Also, much of our food is packaged in plastic of some kind. Traditional packaging is petroleum based which is dependent on the price of crude oil. So basically it costs more for you to drive to the supermarket where it costed more for food to arrive in its more expensive package.
Our Weak US $$: Simply put, a weak US Dollar means weak purchasing power while importing. For us to import from other countries, it costs us more money for the same amount of stuff. Here are a few charts to demonstrate just how expensive some of these food commodities are today:
A great chart to follow is the CCI (Continuous Commodities Index) which is made up a some major commodities including: Oil, Sugar, Wheat, Cocoa (lots of food and energy). As you can see we have surpassed the peaks of 2008 before the housing bubble burst. This is not a pretty chart. “On 5/25, Starbucks announced an average price increase of 17% on bagged coffee in all of its US cafes. Going into affect in mid July, this comes after a 12% increase in March.” Read More
Conclusion: Brace yourselves for higher prices all around throughout the reminder of 2011 and possibly into early ’12.