Yes Virginia, There is Food Inflation

November 10, 2010

In case you were skeptical (and apparently some still are) — a quick roundup on the food inflation front.

1) Dean Foods (DF) becomes another casualty of sky-rocketing input costs (hat tip TRB). From the conference call (upon which the stock got whacked):

The negative effect of this volume softness was amplified by the dramatic increase in Class II butterfat costs in the quarter, which created additional pressure on gross profits. Class II butterfat averaged $2.12 per pound in the quarter, and increased 70% from the year-ago period and more than 25% above the second quarter.

As a reminder, Class II butterfat is a key input in our creamer, cultured and ice cream products businesses, where the pass-through of changes in input costs is less efficient than fluid milk.

The continued gross margin pressure on the business, higher fuel costs and increased bad debt expenses all contributed to drive segment operating profit well below year-ago levels…

2) From the UK:

UK food prices were 9.8% higher last month than a year ago, the biggest annual increase since October 2008, according to the Office for National Statistics. Imported food prices climbed 4.5% on the year, the fastest rate since October 2009, pushing up the price of bread and margarine.

3) And in the United States

An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades.

Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months.

And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.

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4) And of course China

Everything is expensive right now — food, especially the vegetables,” said Li Huijun, a 53-year-old hospital clerk, who complained as she shopped at Lianhua Supermarket in Shanghai that lettuce used to cost only 1 renminbi per 500 grams, or 15 cents for about a pound, but now costs about twice that amount. “And not to mention clothes, and shoes,” Ms. Li said. “They all went up, except my salary.”

And yet, things may be even worse than the consumer price index suggests. A growing number of analysts say inflationary pressure is stronger than the price index indicates, because it is heavily weighted toward food — particularly pork prices. Rising energy, property and transportation costs are not as significant a factor in the index. And even the price increases of many food items — aside from pork — are also not adequately weighed or calculated, analysts say…

5) Not to mention the rest of the world

The CRB/Reuters U.S. Spot Raw Industrials index, a gauge of 22 commodities including butter and soybean oil, rose to an all- time high on Oct. 25. Meat prices advanced to a two-decade high in August, according to a UN index….

Palm oil traded on the Malaysia Derivatives Exchange may rise 18 percent to 3,600 ringgit ($1,161) a metric ton by March, extending this year’s 15 percent advance… “The critical period of tightness is yet to come,” said Dorab Mistry, a director at Godrej International Ltd. who has traded cooking oils for more than three decades…”

6) And, as a piece de resistance, the CEO of Starbucks weighs in:

Let me give you some perspective on coffee prices as we see it… This is the first time in our entire history that we’ve seen coffee prices artificially soar when there is no real issue on supply and demand.

So we’re dealing with uncharted waters here. And the unfortunate thing is, that the people making money on the coffee market are not coffee growers. It’s people on the financial side.

So, yeah. For those saying “inflation is contained,” try looking a little harder.

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3 Responses to Yes Virginia, There is Food Inflation

  1. Jr Deputy Accountant on November 10, 2010 at 2:59 pm

    Also, it would be fair to point out that "food inflation" can come in more than one form and isn't always necessarily as obvious as an increase in prices. It can also be translated in shrinking or watering down of product. If you pay $2 for a 12 oz. package of something in 2009 and then $2 for the same something but in a 1.5 oz package in 2010, is that not just as inflationary? Worse, even, because unless you are the type to closely monitor your grocery bill or these sorts of matters, you may not even notice. Tricky tricky.

    Post all the charts you like, I'm afraid the sheeple still aren't buying it. Too bad we won't be able to eat all that slack in the economy when it comes down to needing to eat.

  2. @baychev on November 11, 2010 at 9:28 am

    so dear (or deer?!?) Ben, does money printing help the economy grow and create employment? does it really benefit debtors? only if they used the credit for production expansion and definitely not if it was used for consumption. looks like you are trapped in your own stupidity, nevertheless, continue printing because this is all you are good at.

  3. Jack Sparrow on November 11, 2010 at 12:07 pm

    Right — I think it was Orwell who said, "Some ideas are so stupid only an intellectual could believe them."

    Couple that with "To a man with a hammer, everything looks like a nail" and you've got Bernanke.

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