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Commodity – Food Cost Issues Continue to Percolate

Associated Press writer Katherine Corcoran reported on Thursday that, “If you’re seeing your grocery bill go up, you’re not alone.

“From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions.

“Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.”

The AP article added that, “The world’s poorest nations still harbor the greatest hunger risk. But food protests now crop up in Italy, as well as Burkina Faso and Cameroon. While the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan.

“‘It’s not likely that prices will go back to as low as we’re used to,’ said Abdolreza Abbassian, economist and secretary of the Intergovernmental Group for Grains for the U.N. Food and Agriculture Organization (FAO). ‘Currently if you’re in Haiti, unless the government is subsidizing consumers, consumers have no choice but to cut consumption. It’s a very brutal scenario, but that’s what it is.’”

Later, Ms. Corcoran noted that, “In decades past, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices down. But new liberal trade policies have made agricultural production much more responsive to market demands — putting global food reserves at their lowest in a quarter century.

“Without reserves, bad weather and poor harvests now have a bigger impact on prices.

“‘The market is extremely nervous. With the slightest news about bad weather, the market reacts,’ said economist Abbassian.”

With respect to inflation, Neil Irwin and Alejandro Lazo reported in yesterday’s Washington Post that, “Inflation is not occurring because labor markets are tight or because the U.S. economy has been overstimulated; if that were the case, wages would be driving inflation up, leaving ordinary households in decent shape and doing more damage to those who lent money at fixed interest rates.

“Instead, this inflation is driven by global commodity markets. China, India and other developing countries’ thirst for oil has been growing faster than producers can quench it, sending the price of oil up about 60 percent since 2006. Prices for oil and other commodities fell yesterday though they remain very expensive by any historical standard.”

The Post article indicated that, “The rapid growth of developing nations, combined with the increasing use of land to produce ethanol, has led demand for food to outstrip supply. That middle-income family is spending $253 more each year on groceries than it did two years ago, assuming it did not change its buying patterns.

“The price for dairy products has risen 15 percent since 2006; fruits and vegetables are up 10 percent. Even routine cereals and bakery products are up 8 percent.”

In short-term developments, some key commodity futures prices declined late this week. AP writer Stevenson Jacobs noted that, “Commodities prices plummeted Thursday, with precious metals, agriculture and crude oil futures all falling sharply as a rebounding dollar led to heavy selling of hard assets.”

The article explained that, “Agriculture futures were among the hardest hit, with wheat closing below $10 a bushel on the Chicago Board of Trade for the first time in more than six weeks. The May contract dropped 86.5 cents Thursday to settle at $9.87 a bushel, after earlier falling as low as $9.77.

“Other agriculture futures also traded lower. Soybeans for May delivery fell the 50-cent daily limit to settle at $12.07 a bushel on the CBOT, while May corn futures dropped 19.75 cents to settle at $5.075 a bushel.”

In a related news article, Aaron Lucchetti and Carolyn Cui reported in yesterday’s Wall Street Journal that, “Since the end of January, Nymex has increased its margin requirements five times on platinum and palladium. The Minneapolis Grain Exchange has raised margins on wheat futures four times this year, and Thursday, the Kansas City of Board of Trade increased its margins on wheat-futures contracts by 50% as a result of ‘increased market volatility.’

“The Commodity Futures Trading Commission, which oversees the exchanges, will hold a public meeting April 22 to ‘ensure that the exchanges are functioning properly to discover prices and manage risk.’ Among the topics to be discussed: the impact of higher margin requirements, possible price discrepancies in the wheat and cotton markets as well as the role of new commodity index funds in soaring prices.” (related press release available here).

The Journal writers also pointed out that, “Oil is down 7.7% from its record of $110.33 set last week, closing at $101.84.”

Meanwhile, USDA’s Economic Research Service noted in the March edition of the “Livestock, Dairy, and Poultry Outlook,” (March 19) that, “With table egg production continuing to be lower on a year-over-year basis, wholesale egg prices are forecast at $1.50 to $1.56 per dozen in first-quarter 2008, up over 40 percent from the previous year.”

On page 11, the ERS report stated that, “Lower product prices will result in lower milk prices in 2008. The Class IV price is forecast at $14.95 to $15.65 per cwt, substantially below 2007’s average of $18.36 per cwt. The Class III price is expected to decline to $16.15 to $16.75 per cwt, down from 2007’s $18.04 per cwt average. The all milk price is forecast to average $17.30 to $17.90 per cwt, a drop from $19.13 in 2007.”

Washington Post writer Michael Laris also reported recently that, “In the race between her family’s income and four hungry sons, Norma Jean Young says the boys are beginning to win

“The cost of the five loaves of bread and four gallons of milk that her three teenagers and 11-year-old churn through in a week has increased 11 to 17 percent since early last year. The price of eggs is up even more, jumping 30 percent to their highest point since 1984, according to federal tracking data.”

Later, the Post article stated that, “At the same time, most U.S. farmers, feeling pressure from animal welfare advocates at home and in Europe, have been voluntarily cutting the number of birds kept in a typical 24-inch by 20-inch cage.

“Together, the cutbacks, resulting in 5 million fewer hens nationally, helped bring about today’s spike. Fewer eggs equals higher prices.

“Feed costs are up, too, pushed by overseas demand for grains and corn-hungry ethanol producers. And bills are higher for the fluorescent henhouse lights and fuel.

“But energy costs affect everybody, said Dave Harvey, a USDA poultry and fish farming analyst. ‘Eggs have gone up a lot more than most other things,’ he said. ‘It’s a combination of lower supplies and high export demand — those are the big things right there.’”

David Irvin reported in yesterday’s Arkansas Democrat Gazette Online that, “The top manager of Springdale-based Tyson Foods Inc. is escalating the battle between food and fuel, calling for the end of federal mandates on corn-based ethanol production.

“Tyson Chief Executive Richard Bond has been joined by other poultry companies also critical of domestic ethanol production, though advocates for the fuel sharply dispute the notion that mandates are causing trouble for the processors.”

Mr. Irvin added that, “In talks with media and analysts, Bond has used words like ‘absurd,’ ‘wrong’ and ‘bad’ to describe the government’s ethanol policies. On Feb. 19, while speaking at the Consumer Analyst Group of New York conference in Boca Raton, Fla., he called ethanol mandates ‘almost criminal.’ Bond’s language seemed to heat up after President Bush signed into law in December a mandate that will increase ethanol use sixfold by 2022. That policy will lead to major food inflation that will affect every household, Bond said.”

More specifically, the article reported that, “‘The more I study this issue, the more I learn about the unintended consequences of our government’s current policy to promote corn-based ethanol,’ Bond wrote in a recent e-mailed response to questions for this article. ‘In addition to higher food prices for consumers, one of the most serious consequences is the impact on efforts to feed the hungry.’ However, other factors such as increased global grain exports, world population growth and high fuel prices play a larger part in the higher cost of corn, ethanol advocates say. By 2015, the ethanol industry is expected to produce about 16 billion gallons, according to the Energy Information Administration, a division of the U. S. Department of Energy.”

On the other hand, Mr. Irvin noted that, “‘Overheated rhetoric gets us nowhere,’ said Matt Hartwig, chief spokesman for the Washington-based Renewable Fuels Association, which represents ethanol manufacturers. ‘We have a number of serious issues that we have to deal with at the end of the day; chief among them is diversifying our energy supply. Ethanol is helping do that today by displacing the need for imported oil and finished gasoline.’ The United States has 145 ethanol plants in operation and another 60 being prepared, Hartwig said. The Energy Information Administration wrote on March 12 that U. S. ethanol production will reduce domestic oil demand by 130, 000 barrels per day this year. However, the same report showed the United States on average consumed 20. 7 million barrels of oil a day in 2007.”

And in news regarding how some food companies are coping with higher input costs, Dow Jones writer Matt Andrejczak reported yesterday that, “Under mounting pressure from surging commodity prices, makers of the name-brand foods that fill the nation’s grocery shelves are fighting back on several fronts, deploying an arsenal that includes jacking up prices, shutting down factories, and shedding less profitable brands.

“But one of the most effective weapons used to defend their bottom line — and one they rarely discuss in public — involves placing big bets in the grains market, a strategy known as hedging.

“Food makers use hedges to protect against sudden price moves, smoothing out some of the peaks and valleys in the commodities market by managing risk through futures and options. This gives them a better idea of what kind of costs they are likely to encounter in the months ahead, crucial to budget planning.”

The Dow Jones article indicated that, “General Mills chalked up $151 million in gains from hedges in the volatile agricultural and energy markets during its quarter ended Feb. 24. This added 27 cents a share to the earnings of the Minneapolis maker of Cheerios, Nature Valley snack bars, and Yoplait yogurt.”

Mr. Andrejczak also stated that, “The U.S. Agriculture Department forecasts average prices for wheat, corn and soybean meal will continue to hover well above their 10-year averages through 2008, bloating their share of corporate budgets.

“While Kellogg Co. (K) expects to pay more for grains and other commodities this year, the maker of Special K cereal and Pop-Tarts said it has hedged a healthy 70% of its commodity costs for the year.”

Food Aid- EU, U.S.

Reuters writer Jeremy Smith reported on Wednesday that, “EU regulators may have to find new food sources for a 20-year scheme that feeds millions of Europe’s poor after radical policy changes put an end to the notorious grain mountains and milk lakes of the 1980s and 1990s.” (related link from the European Commission Online)

“The Commission has opened an internet consultation that will run until mid-May, to ask charities, national government experts, non-governmental organisations and any interested EU citizens for their views on how the scheme should proceed.

“The food aid scheme was set up during Europe’s exceptionally cold winter of 1986 when surplus stocks of food commodities were given to national charities to distribute to needy people. Now, after a series of policy changes, those stocks are mostly gone.”

Mr. Smith added that, “Before the EU’s mammoth reform of its Common Agricultural Policy (CAP) in 2003, public stocks of cereals, beef, butter, milk powder, olive oil, rice and sugar were usually plentiful and stored in warehouses around Europe at taxpayers’ expense. But those large surplus stocks, for which the EU was heavily criticised by its trading partners for exporting with subsidies, are now mostly non-existent, with the exception of sugar.

“‘The phasing-down of systematic intervention on the markets, together with a growth in demand for staple food products, means that only small quantities are now available for the ‘most deprived’ scheme,’” the Commission farm unit says on its website.”

And Reuters writer Missy Ryan reported on Thursday that, “Aid groups are asking Congress for a 70 percent increase in supplemental funding this year to ensure that historically high commodity prices don’t truncate U.S. food aid donations.

“The groups say at least $600 million is needed this year to avoid gaps in food donations and help those hardest hit by skyrocketing prices for staples like bread and milk.

“‘Without increased funding … food aid programs that help low-income and food-deficit countries, malnourished infants and children, desperately poor families and people affected by crises will be cut back,’ a coalition of 17 aid groups said in a letter this week to House and Senate appropriators.”

Keith Good