Smelling Signs of Inflation: Stubborn High Food Prices and Shrinking Supplies

As we have been saying, media and experts have been insisting to us of the mutually reinforcing feedback loop of falling demand=falling prices centered on a global deflation theme.

But, we have been getting additional evidence of the obverse side, falling prices=falling supply!

This makes the entire episode a race to the bottom.

Courtesy of New York Times

The chart above shows of the stubbornly high food prices despite falling prices in the commodity sphere. Yet, food prices are projected to remain high next year even under an expected recessionary environment.

From the New York Times,

``Now, even though costs for ingredients like corn and wheat have dropped, meat and poultry providers say they still have not raised prices enough to cover their increased costs. And packaged food manufacturers are unlikely to lower prices because commodity costs remain relatively high and they are still trying to rebuild eroded margins.

``Michael Mitchell, a spokesman for Kraft Foods, said that the company’s food ingredient costs this year were running $2 billion higher than in 2007, a 13 percent increase, but that the company had raised its overall prices by only 7 percent.

William P. Roenigk, senior vice president and chief economist for the National Chicken Council, said his industry had been losing money for more than a year. Chicken producers are now trying to recover those costs by reducing production, which will eventually alter the balance between supply and demand. “The time is coming when we’re going to see a very significant increase in the retail price of chicken,” he said….

``When costs go up for livestock producers, they are often unable to immediately raise prices because those prices are set on the open market, which is dictated by supply and demand. Instead, they begin reducing the size of their herds or flocks, which eventually leads to less meat on the market and higher prices. But reducing livestock production can take months to years, and in the interim it can actually suppress prices as breeding animals are slaughtered to reduce production.

``The prospect of more food inflation is inflaming a debate over its causes. Many food manufacturers and economists maintain that one culprit is government policies promoting the use of ethanol fuel made from corn.

``About a third of the corn crop is used for ethanol, putting ethanol producers in competition with livestock farmers and food manufacturers. The result, they contend, is that prices for corn are now higher and more volatile.”

So aside from the unintended consequences from ethanol subsidies, news accounts omit the fact that global government has been throwing tons of money to rescue the global financial system and the world economy and should likely impact food prices overtime.

Same account of falling prices and tighter credit equals falling supply in Brazil.

This from Bloomberg (all highlight mine),

``The collapse of global credit markets that is pushing the U.S., Europe and Japan into simultaneous recessions for the first time since World War II also threatens farmers in Brazil, the world’s biggest grower of coffee, oranges and sugar cane, the second-largest producer of soybeans and third-biggest of corn. Smaller harvests in Brazil may increase costs of commodities next year, said Andre Pessoa, an analyst at Agroconsult who conducts the country’s broadest crop survey.

``Reduced fertilizer use will lower Brazil’s soybean output as much as 2.7 percent, while corn may decline 7.3 percent, the government said Nov. 6. Brazil’s coffee harvest may drop 26 percent next year, said Lucio Araujo, the commercial director at Cooxupe, a cooperative representing 11,000 growers in the Guaxupe region.

``Brazilian growers were short of at least 15 billion reais needed to invest in crops, Agriculture Minister Reinhold Stephanes said Oct. 9. Banks and financial companies worldwide, suffering from $969.5 billion of losses and writedowns since the start of 2007, are restricting credit as they struggle to replenish reserves, according to data compiled by Bloomberg…

Ah, high Fertilizer costs has also been aggravating the supply woes, the same report from Bloomberg,

``Fertilizer costs remain high, even as funding dries up and prices fall. The price of the nitrogen-potash mix that Terra, the coffee grower, uses has more than doubled in the past year to 1,800 reais a metric ton, he said. Terra usually buys about 10 tons for his trees. This year he’ll go without.

``The lack of sufficient fertilizer will compound an already smaller crop in Brazil as trees enter the lower-yielding half of the two-year cycle for coffee harvests.

“A lot of people are ceasing to plant because it’s not viable,” the corn association’s Barbieri said. “People have lost hope.”

So of the two competing reflexivity feedback loop premises one will be umasked as a false premise.

Our guess: prepare for inflation.