http://www.marketskeptics.com/2009/0...sing-fast.html Thursday, January 29, 2009 *****World Food Prices Are Rising Fast***** by Eric deCarbonnel As much as I hate to rain on the deflation parade, I must point out that food inflation is increasing worldwide. It seems that food prices are unaware that they should be falling, because they are instead rising fast all around the world. For example in India, after more than two months of steady decline, inflation has risen for the second week in a row due to a spike in food prices. The Economic Times reports that Indian inflation touches 5.64 pc with no respite as prices rise. (emphasis mine) NEW DELHI: Costlier food items and a marginal increase in prices of decontrolled fuels pushed up inflation for the second week running even as economists stuck to their estimate of near zero inflation by the middle of 2009. Government data showed inflation for the week ended January 17 at 5.64% against 5.6% in the previous week. The annual rate of year-on-year inflation was 4.45% in the corresponding week last year. RBC News reports the same story in Russia, as inflation creeps up. Russia's inflation amounted to 0.8 percent between January 20 and 26, 2009, and 2 percent for the year to date (compared to 2.2 percent for the same period of January 2008), the Federal State Statistics Service (Rosstat) reported today. In January 2008 as a whole, the inflation rate stood at 2.3 percent. The rise in granulated sugar and tea prices contributed the most to the past week's inflation, reaching 6.5 percent and 1.2 percent, respectively. Meanwhile, prices for frozen fish, canned meat, rice, salt, and powdered baby milk increased 0.5-0.7 percent, whereas egg prices fell 1.3 percent and sunflower oil prices 0.8 percent. Fruit and vegetable prices rose 1.3 percent on average, while car gasoline and diesel fuel prices edged down 0.7 percent. In Australia, Farm Online reports that fruit prices up 8pc, despite big CPI fall. Australian retail fruit and vegetable prices rose by 8pc in the December quarter, standing out against the overall falling price trend, which has resulted in the biggest slide in consumer prices (CPI) for 11 years. Fruit and vegetables received special mention among the Australian Bureau of Statistics CPI figures for leading the few price rises, followed by takeaway food, which increased by 1.5pc. Fruit's prominent role, especially, in leading the CPI statistics is likely to be to stir vigorous comment from many Australian fruit growers. Stone-fruit growers recently have been claiming prices received for their fruit have fallen below cost of production. They’ve been vocal in criticising the supermarkets for not paying enough for their fruit. In South Africa, the Business Day reports that food remains a worry despite falling CPIX. Measured by the target measure CPIX, consumer price inflation came in below market expectations at 10,3% in December, down from 12,1% in November and the recent peak of 13,6% in August. Transport inflation was sharply down, at only 2% year on year, from 13,3%, because of further cuts in the petrol price, which is now almost 50% down on its July peak. Food remains a worry, though. It remained stubbornly high at nearly 17.1% in December, despite declining international grain and other commodity prices. In Northern Ireland, the Belfast Telegraph reports that the food bills soar at more than double the inflation rate. Consumers in Northern Ireland could find rising food bills an added challenge as the recession starts to bite over the coming months. New figures provided by comparison website mySupermarket.co.uk reveal that the cost of food is going up at more than twice the official rate of inflation. The statistics show that the price of all food and drink products has risen by 6.6% during the year to January 14. They also show even steeper price rises for staple food items — such as bread, milk and cheese — with the cost of a basket of goods rising by 16% during the past year. In Canada, the Ottawa Citizen reports that consumers face higher costs despite low inflation. OTTAWA — Canadian consumers — tens of thousands of whom have already lost their jobs to the recession — may find this hard to swallow, but despite headlines of falling interest rates and waning inflation, their grocery bills and borrowing costs are in fact rising. While prices fell 0.7 per cent month-to-month and the annual inflation rate to 1.2 per cent in December — projected to fall below zero this year — grocery prices were nine per cent higher than a year earlier, Statistics Canada reported Friday. "Inflation is at a two-year low, but that's not the way it feels for those of us shopping for groceries," said CIBC World Markets economist Krishen Rangasamy. "As talk of generalized deflation is surfacing, prematurely in our view, food prices continue to trend higher, with the depreciating loonie boosting prices for fresh fruits, vegetables and other imports." My reaction: Despite the economic crisis and widespread deflation fears, world food prices are rising. This major escalation in food prices calls to question the conventional wisdom that inflation is not a problem. 1) Rising food prices are likely to continue There is a misguided notion that lower demand, lower commodity costs, and deflation will lead to lower prices. This is false: A) Falling demand only lowers prices when producers have room to cut prices. If businesses have no profit margin with which to absorb lower prices, then falling demand, instead of lowering prices, lowers the supply of goods by forcing companies into bankruptcy. This is what is happening, as demonstrated by Pilgrim's Pride Corp, the No. 1 US chicken producer, which declared bankruptcy on December 1. As companies are forced out of business because of their inability to pass on higher costs, the supply of goods is reduced and their surviving competitors have room to raise prices. This can be seen in the rising price of chicken wings in the wake of Pilgrim's Pride’s Bankruptcy B) Companies didn’t raise prices enough in 2008 to compensate for rising manufacturing costs. While the commodity bubble was exploding, companies held back on price increases to avoid losing customers, but now they must pass on last year’s increased costs to stay in business. Kellogg, for instance, earlier this month announced plans to lift prices on three of its cereals in the "low-to-mid single digit" range to help offset increased production costs, and these price increases will likely be matched by rivaling companies. C) Deflation fears are forcing up borrowing costs, which like commodity costs, must be passed on to consumers. While the fed might have lowered interest rates, banks aren't lending and companies face much higher financing cost. The failure to pass on higher borrowing cost will lead to more bankruptcies and less supply. Again, this reduced supply will allow surviving competitors to raise prices. Everyone who is expecting deflation is ignoring this reality: companies can’t sell goods below their production costs and stay in business. Since the profit margins of manufacturers at home and abroad were razor thin going into this crisis, don’t expect prices to drop. Expect companies to go bankrupt. 2) Unlike last year’s artificial inflation, today’s rising prices are the real thing Last year’s inflation, especially the higher prices related to oil, was fake. When oil hit 147 dollars a barrel, it didn’t do so because of supply/demand dynamics, but because of speculator dominated futures markets in the US. Hedge funds, pension funds and, other investors piled blindly commodity indexes and ETFs while knowing nothing of the fundamentals underlying the commodities they were buying, or even WHICH commodities they were buying. This enormous influx of dumb money created an impressive bubble and resulted in artificially high inflation rates seen around the world last year. Today’s worldwide food inflation is a far different story, because it is happening in the face of widespread deflation fears. Consumers are delaying purchases. Banks are hoarding cash (ie: most Chinese merchants aren’t accepting credit cards because banks are delaying payments). Businesses are scaling back expansions and reigning in spending. Yet, despite all these factors, food prices are going up. Isn’t that interesting? It also begs a very interesting question: if everyone, from individuals to businesses, has scaled back their spending due to deflation fears, what happens to already rising food prices when deflation fears go away? 3) Rising worldwide food prices will quickly bring an end to today’s deflation fears Rising worldwide food inflation is surprising and puzzling economists. They don’t understand why it is happening (they didn’t see the credit crisis or the bursting commodity bubble coming either). Next month, as food inflation continues to grow worse and consumers around the world start stockpiling food, these economists will really start to worry, and, in about two months time, with food inflation truly spiraling out of control, they start panicking, their deflation predictions completely forgotten. Conclusion: The US is not immune from rising food inflation: prices for food in US grocery stores jumped 6.6% last year, the biggest spike since 1980. Even this December, which saw gasoline prices fall by 17.2% (the biggest monthly decline in 71 years), food costs refused to fall. If US food prices couldn't muster a fall in December, five months after the commodity bubble burst and deflation fears gripped the world, then they should not be expected to fall at all. Rising worldwide food prices also have very negative implications for the dollar. Many countries that are seeing rising food inflation do possess the means to bring it under control: sell off their US reserves. Russia and India alone have over 800 billion dollars they can sell to strengthen their currencies and lower their food costs. So if food inflation keeps increasing, expect a growing quantity of treasuries to be sold by central bankers desperate to prevent starvation at home. Finally, the rise in world food prices increases the likelihood of out of control inflation in China. Should China drop its dollar peg and start to sell its immense US reserves to fight domestic hyperinflation, the dollar will likely lose its reserve status and most of its value. Buy gold (and food).