The contrarian in me is screaming that Reuters' recent piece on food prices is the food inflation equivalent to Businessweek's famous "Stocks are dead" headline from a 1982 issue. Yet another piece is whispering in my hear "baby, it ain't over yet!"

Perhaps it's a little from column A and a little from column B. Food prices have been going up for decades, so how is this any news that we've reached a 20 year high? The rate of inflation (the official BS one and the much higher one using the original formula) has essentially been depreciating peoples' buying power since the end of the Great Depression. Yet, it seems to me, since the latter third of the last century, the rate of growth for the price of food has been growing ever faster.

WASHINGTON (Reuters) - U.S. consumers should brace for the biggest increase in food prices in nearly 20 years in 2008 and even more pain next year due to surging meat and produce prices, the Agriculture Department said on Wednesday.

Food prices are forecast to rise by 5 percent to 6 percent this year, making it the largest annual increase since 1990. Just last month, USDA forecast food prices would climb between 4.5 and 5.5 percent in 2008.

"It's a little bit of a surprise how strong some of the numbers were in July," USDA economist Ephraim Leibtag, who prepared the forecast, said in an interview.

- excerpt from "Food prices to post biggest rise since 1990: USDA", Reuters, 2008.

The Reuters article highlighted a forecast put out by the United States Department of Agriculture (USDA), in which the rate in the growth in the price of food is still moving ever faster. As mentioned in a previous post, part of the reason why grains going up had to do with speculation because of their possible usage in energy versus food. This added a whole new dimension to grain trading. Speaking of energy, as the USDA mentioned, fuel prices also played a part, as it lead to an increase in transportation costs. Products made from grain also a major increase, as much as 19% with some products.

Above is the cash/spot price for corn. The chart goes back almost a decade. One can see, we started off the century (wow, it still amazes me that we can say that!) with the spot price at $1.80/bushel, but progressing to it's height made this year at $7.45/bushel, we had 313% increase in the price of corn. Of course it has receded to just below $6/bushel, but it is still up there. There were some fundamental conditions as well that aided in the increase like a flood and periodic droughts, but looking at the longer term overall picture, since 2000, corn has been on a bull run. Now that high price was seen before, back in 1996, because we had a major drought that year, but zenith in price was only temporary and it did not conclude some major bull run in the price of corn (just picture a bell curve of sorts).

Yet, outside of the grain complex, the USDA highlighted that the price of meat and veggies and fruits were also growing. The price of vegetables would see a 5.5% rise in prices for July in comparison to June. A big jump, by USDA standards. As with a chart of citrus prices below, you will see that since the start of this decade, prices have been in an upward trend.

(Chart of Agriculture Prices: Citrus Equiv on tree - Fresh Pears, ($ per ton, NSA), as composed by the USDA Agricultural Statistics Board)

Despite the increase in such goods, do not think farmers are making out like bandits. The USDA reported in June how farmers in these products are getting squeezed as well by inflation. For every price increase in veggies or fruit or wheat, there has been a corresponding increase in what goes into growing these crops.

Vegetable and melon net returns are being eroded by rapidly escalating input prices, particularly for fuel and fertilizer. Based on an index calculated by ERS using items pertinent to vegetable production, average input prices paid by vegetable and melon growers increased 7 percent in 2006, 8 percent in 2007, and are currently running 14 percent above a year earlier so far in 2008. At the same time, average prices received by
commercial vegetable growers have not kept pace and are currently running below a year earlier.

- excerpt from "Rapid Input Price Rise Squeezing Growers", USDA, 2008.

This links back to the Reuters' piece, as we start to see a cycle where one rise in cost potentially leads to another, especially if one crop is used to raise livestock. Meat, and the derivatives that come from cattle and pork and poultry are following the corn products they feed on.

Prices are expected to rise by 4 percent to 5 percent in 2009, lead by red meat and poultry. The forecast, if correct, would be the third straight year where food prices have surged at least 4 percent.

In its latest food prices report, USDA said the increase for 2008 was due partly to higher costs for meat, poultry and fish, which make up about 12 percent of total food spending. Overall, costs for these items are forecast to rise 3 percent compared to 2.5 percent estimated last month.

- excerpt from "Food prices to post biggest rise since 1990: USDA", Reuters, 2008.

Business that retail in food products have been particularly hurt. Though fearful of passing on the costs to customers, many have tried to look around to find ways to cut costs. Yet, this has had a limited effect, and we always return to the price of their primary supply, meat. McDonald's in particular has been grousing on how input costs have been hitting them hard, and that menu changes were most likely to happen (goodbye dollar value meal?).

If it may please the reader, I would like to highlight the cascading effect on how inflation in one product shows up in another. For this purpose, cattle prices and products from cattle will be used. When cash/spot pricing data is available, I will use that, otherwise the futures contract will have to suffice; rest assured, both move in tandem, as you will see between the live cattle futures contract and the spot price charts just below.

(Cash price chart for live cattle)

(Continuous contract price chart for Live Cattle futures)

Before we continue, allow me to apologize at the appearance of these two charts. In the attempt to gather the appropriate data, it seemed as if my source had a different format for the cattle spot price chart than that of the futures version. The cash price version seems to be "crushed" or compacted, while the futures version seems to look like a more volatile chart in comparison. Believe me, they both are really the same. Either way, though as you can see, if you ignore the open interest purple line under the futures price, one could see that the trends (and dates) match up.

Looking at the cattle chart, we started the century at around $65 (both futures and spot) and have ended at or just above $100. A $35 dollar jump equating to a 54% increase! No wonder the Happy Meal restaurant is upset! Of course, this would have a fallout on other products coming from our friend the cow.

(Continuous contract price chart for Class III Milk futures)

Class III Milk, which is the type of milk used to go into chedder cheese for example, has been on a tear. It's price go from $10 at the beginning of the century, for the delivery of 200,000lbs of the stuff, to a recent price of $16.50/200,000 lbs; a 65% increase in less than a decade. It's no surprise that Class IV Milk (that goes into butter) and butter itself have followed along the same bullish road.

(Cash price chart for Butter)

Butter, in my opinion, has been the most volatile of the ag' stuff. In short of 9 years, this thing has seen a doubling in price twice! Yet, despite it's rise and falls, if one were to draw a line, you'll find an upward trend still forming. The price for the delivery of 40,000 of Grade AA Butter at the beginning of the decade was $120, we are now (as of this morning) at $161.

The overall picture that is forming is that despite calls of low-to-moderate inflation rates, in reality food is dancing at it's own tune, and it's one of those high tempo techno beats! The US Dollar (and I suspect all other currencies) against commodities as a whole have been on a losing side of this battle for a long time. Below is two major charts, the USDA's price index of what farmers are getting and the famous CRB Index. Now keep in mind, that when looking at the first, that despite the increases farmers are still facing ever escalating costs.

(Chart of Index of Prices Received by Farmers: Foods Commodities, (1990-92=100))

The last chart is the CRB Index. I wanted to include this previously, but couldn't get it up on time. The CRB Index, put out by the Commodities Research Bureau, is something of the "gold standard" of commodities price gauges. While no energy products are included what is included is products that could be affected and also common industrial and agricultural product. Below is a listing in what's in the index, I think you'll see why the institutional investors look at this thing.

Current Construction

* Metals: Copper scrap*, lead scrap, steel scrap, tin, and zinc*.
* Textiles and Fibers: Burlap, cotton, print cloth, and wool tops.
* Livestock and Products: Hides, hogs, lard, steers, and tallow.
* Fats and Oils: Butter, soybean oil, lard, and tallow.
* Raw Industrials: Hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber (59.1%).
* Foodstuffs: Hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat, and sugar (40.9%).

(Chart of the cash price of the CRB Index)

If there ever was a smoking gun on inflation, the CRB Index is it. Even I'm blown away every time I look at this thing! From 2000 to today, we've had a 133% increase in the price of goods (166% if one wanted to go at the peak)! To you conservative free-trading marketeers out there who think inflation has been under control and that folks' earnings are fine, this chart basically shows how wrong you are.

Now of course things could change and we could be on the virge of a commodities secular or cyclical bear market. But the fundamentals do not support this. First our population is growing, aging but still growing, and with that comes the demand for more food. The environment is eroding, and because of this we are having a negative correlation to demand as supply or land available to produce supply is contracting. The third world will soon be a second and eventually catch up to us by the end of the century. Asia, particularly China and soon India, is developing a massive domestic consumer market. With that birth comes the demands for more protein products like meat. We've already highlighted the corresponding effects on other products along the chain.

Adding to all this comes more volatility. As companies begin to look at other countries for food (I hear that the Ukraine could regain its title as the breadbasket of Europe) in more unstable regions (gee, this sounds awfully familiar, don't it?) expect more price swings. Food companies have come to realize that the days of stable input prices are over. We mentioned in a previous Manufacturing Monday, that firms in various industries are now hiring commodity traders to help maintain costs. And today, the Financial Times has a piece on volitity and ag prices.

Cargill, the US agribusiness conglomerate, said on Tuesday it expected US grain prices to remain volatile for the coming year, prompting more food companies to expand their hedging activities to protect themselves from price rises.

“The volatility’s certainly going to continue,” David McLennan, chief financial officer, told the Financial Times.

“Just look at recent months. We had record prices in June, a sell-off in July and a rally in August.”

The FT reported this week that food and consumer-goods companies were turning to commodity trading houses for the first time after being caught out by rises in the prices of raw materials that have squeezed margins and cut profits.

- excerpt from "Cargill expects US grain volatility to persist", FT.com, 2008.

Americans know how all this ends up. Inflation and wage stagnation has essentially put them in an economic vice. Where there is a deficit in earnings, there has been an increase in credit usage; the latter later ending up increasing the pain. The price of everything seems to be going up, one wonders if we're living in the United States or Zimbabwe. As the Wall Street Journal noted today, hopes of wage increases are diminishing as employers are getting slammed on costs of doing business.

Consumer prices are rising at their fastest pace in more than a decade in both the U.S. and the euro zone. But it's affecting workers on the two sides of the Atlantic in very different ways.

In Montgomery, Ala., Steve Murphy, an instructor for adults with mental disabilities, doesn't expect to get a raise because his employer is getting squeezed by higher fuel bills. In Madrid, Spain, travel agent Ignacio Temprano gets raises to match inflation because Spanish unions helped negotiate such increases into law. He says he considers the extra money "a bonus."

- excerpt from "Inflation Is Stinging U.S. Workers Harder", WSJ.com, 2008.

The article noted that in the more heavily unionized Eurozone, inflation-related deals and laws have kept wages more in pace with inflation, though not entirely. This begs the question, if the pressure to increase wages gets to the point of massive labor disputes, would this also merely add to the inflation situation? The situation looks dire, and right now the rate of inflation is significantly higher than that of wage growth. Many economists have been fearing wage-produced inflation, but given the rates of growth for each, I think that it isn't really an issue. Indeed, we have ample room to move up wages before it starts to kick up inflation further or out of control.