Tuesday, July 16, 2019

Food prices on the rise. But how much will it change things?

I certainly didn’t think I’d spend so much time looking at food prices in 2019. But between the farm crisis, a rain-filled Spring that delayed planting in the Upper Midwest, and the widespread discussion of interest rates (and by proxy, inflation), that’s been the case.

And 3 reports from the last week are telling an interesting tale, as food prices are starting to jump, particularly in sectors that had been beaten down by surpluses and trade disruptions. Which means perhaps inflation isn’t as muted as we think, and that rates won’t be able to be cut as much as Wall Street would like.

To start with, let’s go to last week’s Consumer Price Index report. Prices for commodities went down by 0.3% last month, led by a drop , Overall food prices went down as well, but note what did go up in the second paragraph.
The food index was unchanged in June. The index for food at home declined 0.2 percent after increasing 0.3 percent in May. Four of the six major grocery store food group indexes declined in June. The index for meats, poultry, fish, and eggs, which rose 0.8 percent in May, fell 0.7 percent in June as the index for beef fell 1.3 percent. The indexes for cereals and bakery products and for nonalcoholic beverages both fell 0.6 percent in June after rising in May. The index for fruits and vegetables fell 0.5 percent in June, its third consecutive decline.

In contrast to these declines, the index for other food at home rose 0.7 percent in June after being unchanged in May. The index for dairy and related products rose 0.3 percent in June, its fifth consecutive monthly increase. The index for food away from home rose 0.3 percent in June after a 0.2- percent increase in May. The index for full service meals rose 0.6 percent in June while the index for limited service meals was unchanged.
After bottoming out at the start of this year, dairy prices have been making a steady climb, and are finally above where they were 12 months ago (albeit by only 0.6%). Too late for all the dairy farms that have already closed, but let’s see if that slows the pace down from the 3 closings-a-day level that we reached earlier this year.

I was also interested in what corn was doing after numerous reports last month about many farmers being forced to delay planting due to a late Winter and rainy Spring, or not planting at all. It looks like corn is still behind schedule, but if weather stays warm and dry in the key growing areas this month, it might not be so bad.

Oddly, the CPI report does not list corn on its own, but I did see, “rice, pasta and cornmeal” up 1.3% last month. Conversely, the Producer Price Index does list corn, and that report shows the same dichotomy that we see in consumer prices - most US goods had lower prices, but food is now rising after being beaten down for much of 2018 and 2019.
Final demand goods: Prices for final demand goods moved down 0.4 percent in June, the largest decrease since falling 0.6 percent in January. The June decline is attributable to a 3.1-percent drop in the index for final demand energy. Conversely, prices for final demand foods climbed 0.6 percent. The index for final demand goods less foods and energy was unchanged.

Product detail: Nearly 60 percent of the June decrease in the index for final demand goods can be traced to a 5.0-percent decline in prices for gasoline. The indexes for diesel fuel, meats, liquefied petroleum gas, iron and steel scrap, and residual fuels also moved lower. In contrast, corn prices rose 19.9 percent. The indexes for ethanol and residential electric power also increased.
And in looking at the CME futures prices, it seems like the rebound in soybeans and dairy prices will continue over the next few months.

The trend of rising food prices has even started to show in export prices. While most export prices of US products dropped in June, leading to an overall decline of 0.7%, that wasn’t the case for crops and other farm products.
Agricultural Exports: Prices for agricultural exports increased 2.7 percent in June following a 1.1-percent decline the previous month. The advance was the largest monthly rise since the index increased 3.8 percent in December 2018. In June, the advance was led by a 13.5-percent rise in corn prices and a 5.0-percent increase in soybean prices; higher fruit, wheat, and nut prices also contributed to the overall rise in agricultural prices. Despite the June advance, agricultural export prices fell 1.9 percent from June 2018 to June 2019. The drop over the past year was led by a 14.4-percent decrease in soybean prices.
If I wrote this a couple of days ago, I would have been even more concerned about a sizable jump in inflation for the coming months. Not just because of the higher food prices, but also because oil futures had risen by 17% between early June and early July. But oil has now dropped by $2 a barrel this week, so that could keep prices from galloping away (well, by 21st century standards, anyway).

Regardless, let’s see if there is any reference to these emerging prices over the next 2 weeks, which culminates in a Federal Reserve meeting which is expected to deliver the first interest rate cut since the 2008 financial crisis. Wall Streeters bid up the stock market last month in anticipation of there being more cuts to keep the cocaine party going, but rising food prices on the farm and on Main Street could put a stop to that thought sooner than expected.

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