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Many disinflationary forces still predominate around the globe, and conventional wisdom dictates that this is predicated on the downward slide of commodity prices in recent years. Coupled with the cratering velocity of money, we would agree.
It could be, however, that the trajectory of inflation has reached an inflection point and is about to change. Of late, more and more is being said and written about food inflation. The relatively sudden rise in food prices, which has major implications for the emerging markets, in particular. Many regular readers of Morning Notes will know that we still believe in the primacy of food security as forces as disparate as the weather and urbanization coalesce to push the price of food upwards.
Some recent headlines reinforce this assertion:
Food Prices Surge as Drought Exacts a High Toll on Crops – WSJ 3/18/14
Brazil Drought Jolts Commodities' Prices – WSJ 3/4/14
Rising Food Prices Bite into Household Budgets – USA Today 3/19/14
With emerging market currencies seemingly depreciating in lock step with food inflation, imports have become more expensive. The weaker currencies and higher inflation rates are a “double whammy,” as food has not only become more expensive, but also consumes a much larger portion of disposable income for the average citizen in an emerging market than it does for a citizen in the developed world.
That said, the chart below from ZeroHedge shows the spot price of the CRB Commodity Index in the US has exploded higher. This is due to a mixture of factors including bad weather and pent up demand, but these shocks are particularly unwelcome in the face of an economy struggling with flat real wage growth.
It's also not just the "staples" like wheat or meat that have seen prices trending upwards. Even the price of shrimp is experiencing hyperinflation:
Source: Business Insider, Morgan Stanley
The dramatic increase in shrimp prices is reportedly one of the reasons Darden Restaurants (DRI) is trying to spin off its Red Lobster seafood chain. Clearly, the restaurant can't pass along a price increase to a consumer who is bereft of the means to pay for it.
Not surprisingly, as food price increases have started to garner headlines, central banks and governments are pledging to step in and ease the pain:
Brazil central bank pledges to limit food inflation jump – Reuters 3/18/14
Government involvement can take many forms, such as trade agreements. China and the Netherlands recently committed to a trade agreement whereby the Chinese will "import" Dutch dairy expertise in order to increase both the quantity and quality of Chinese dairy products:
China, Netherlands to sign trade pacts, including deal on dairy cooperation - Foxnews.com 3/23/14
Perhaps most worryingly, as food prices increase, wages have remained stagnant. Consumer prices in the US have risen by 6.4% since 2011; the price of chicken is up 18.4%, ground beef is up 16.8% and bacon is up 22.8%. This is in stark contrast to median income, which has reportedly gained only 1% over the same timeframe.
Source: Wall Street Journal
The charts below, though slightly dated, show price inflation trends for select food items.
Counteracting This Trend
While there are several ways to protect against rising food prices, educating yourself about technological and geopolitical developments is a good start. With President Vladimir Putin's annexation of neighboring Crimea, several of Russia's allies, including Belarus, are rethinking their relationship with Moscow.
Belarus is one of the most important potash producers on the globe, and if it eventually becomes "in play" in the same way Ukraine has, it could have profound implications for global fertilizer markets. The most recent edition of Foreign Affairs has an excellent article on the subject titled, "Belarus Wants Out: One of Russia's Closest European Allies Begins to Play the Field".
Improving agricultural output can also help mitigate rising food prices, and this is why we have been close followers of the fertilizer space. Despite our contention that commodity markets will remain under pressure due to slack demand and overcapacity, there are opportunities for those with patience, as well as a belief in longer-term emerging market growth and more resource-intensive diets.
Continue reading onto Part II: A Primer on Fertilizers