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Monday, February 28, 2011

Food Inflation

Food inflation is here. Main stream economists and government officials have done everything they can in order to pretend that it wasn't happening. They tried to cheerfully report a fatally flawed monthly CPI number or focus on core inflation which excludes food and energy. However, with the world entering a state of turmoil due to rising unemployment, food costs, and a complete breakdown in the Keynesian model, no one can deny the truth any longer.
Food price inflation has run a muck and has sparked civil unrest in several nations. The math for predicting food prices is easy, wholesale commodity prices are soaring, there's no other way to describe it. The digital printing press is being ramped up with QE2 policies and QE3 rumors already beginning to start from none other than a federal reserve official. Earlier this month the Federal Reserve Kansas City Bank President mentioned that QE3 may be needed. Now in our opinion, most of this food price inflation is a result of QE1 started back in early 2009. In fact, a lot of the major price increases came before QE2, so it is our analysis that we will see a second wave of price inflation in the coming months. However, this could come a lot sooner with oil recently breaching 100 dollars per barrel. In fact, any further disruptions in the middle east could even cause global transportation disruptions in the middle part of 2011. If we see the citizens of Saudi Arabia beginning to protest and demand regime change, then 150-200 oil could happen very quickly. The uncertainty alone would cause oil traders to panic and push the price up just as we have seen over the past few days. Oil of course is in everything, so as oil prices rise, so will most of everything else because even if your product doesn't have oil in it, it still takes a machine that uses oil to transport it.

When looking at the type of price increases we have seen recently (pre-Egypt) it is simply shocking.Cotton is up 150%, wheat 100%, corn 100%, soybeans 50%, and most red meats are up 30% since late 2010. Corn, which has doubled, is in over 4,000 products at the grocery store. You may not eat corn, but it sure is in a lot of the ingredients of foods you do eat. Of course, it doesn't help that nearly 40% of corn is going towards ethanol. Not getting into the politics of corn, but using a core ingredient for livestock and human food has to be one of the stupidest things our government has encouraged. Cotton is currently at a record and the last time we saw a spike in cotton, oil was at 15 dollars a barrel, oil in just the past week has seen a 15 dollar price move, so you know it's not a far stretch to expect cotton and other commodities continue to rise.

2011 was already setting up to be a year of high food prices. Last month the USDA lowered their harvest forecast, raised their demand forecast, and stated that corn reserves will fall to the lowest they've been in 15 years. The first wave of price inflation was at first absorbed by the food companies, but after a prolonged surge in commodities, General Mills, Kraft, Kelloggs, and many others have recently announced they will be hiking prices on their food products. Whether you believe the economy will experience deflation, stagflation, or inflation over the next decade, we believe the evidence for more short term food price inflation is undeniable.

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