The Coming Inflation

This quote was taken from Brad Setser’s blog (though Michael Pettis is currently minding the shop)…..

Logan Wright, a Beijing-based analyst who regularly writes excellent reports on China’s financial system for Stone & McCarthy, puts it this way in a September 27 report called “China’s Perfect Storm? Food Price Inflation and a Possible PBOC Policy Shock:”

First, at the same time that pork prices have driven August CPI growth to 6.5%, China has also been ravaged by unusually harsh floods in the south and droughts in the north. As a result, the autumn harvest, which comprises around 70% of total annual grain output, could produce a significant negative surprise, accelerating the rapid rise in food prices. At the same time, global food prices and futures continue to trend higher based on a series of bad harvests around the world, just as China may need to increase imports to supplement its own supplies. Secondly, signs of weakness in the housing sector spilling over into U.S. consumption are developing, and this could have consequences for China’s exports, which have been a critical engine of China’s growth and a safety valve for domestic overcapacity in several industries. Third, and perhaps most significantly, inflation is more salient politically in China than in other nations, because of its tendency to produce social unrest that challenges the legitimacy of the Chinese Communist Party’s rule. Support for the CCP depends heavily upon improving standards of living for Chinese citizens. This means that the Chinese government is very likely to react quickly and strongly in response to a potential threat of escalating inflation.

This is from Reuters….

LONDON, Sept 28 (Reuters) – Record high coal prices and tight supply are piling the pressure on electricity generators already hit by soaring oil markets and high gas prices, industry players say.

Coal fuels about 40 pct of global power generation. Physical coal prices for delivery into Europe have risen by over 50 percent this year.

High freight rates are tightening the screws on prices and utilities and cement producers, also big coal users, may be forced to scale down operations.

“The market is having to adapt to coal prices, to freights, which we’ve never seen before,” a trader said.

“I do believe that before the end of the year it’s possible that some generators in Asia will have to look at turning off their plants because they won’t have enough coal,” said a coal producer.

This from Bloomberg…

Sept. 28 (Bloomberg) — Commodities had the biggest monthly gain in 32 years, led by wheat, crude oil and gold, as the dollar’s slump enhanced the appeal of energy, grains and precious metals as a hedge against inflation.

The 19-commodity Reuters/Jefferies CRB Index was up 8.1 percent this month, the most since July 1975. Wheat climbed to a record in September amid a global grain shortfall, boosting corn and soybeans. Oil also hit a record, and gold reached a 27-year high. The Federal Reserve cut borrowing costs to bolster the U.S. economy, sending the dollar tumbling.

From the Wall Street Journal….

Rising prices and surging demand for the crops that supply half of the world’s calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world’s poor.

“The days of cheap grain are gone,” says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.
In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.

Not only have prices remained high, but the rally has swept up other commodities such as barley, sorghum, eggs, cheese, oats, rice, peas, sunflower and lentils. In Georgia, the nation’s No. 1 poultry-producing state, slaughterhouses are charging a record wholesale price for three-pound chickens, up 15% from a year ago.

2 thoughts on “The Coming Inflation

  1. In the WSJ article it says,

    “In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.”

    Why have prices remained high? Is something causing demand to sky-rocket, or are famers having persistently bad harvests?

  2. There are a lot of things that play into the current high food prices.

    In the first place you have the rising wealth of the world. In other words, people in Brazil and China who use to only be able to afford rice are now eating meat. This means that there is actually a higher demand for grain, since most meat is grain feed for at least part of its life. You know very well how many pounds of grain it takes to make a pound of meat in chickens. And chickens are far more efficient at turning grain into meat then cows or pigs.

    In the second place, farming is a very energy intensive business. Also, food is increasingly coming from further and further away from where it is consumed. So high energy prices create higher food prices.

    Furthermore, high energy prices and subsidize are encouraging people to burn food for energy.

    Also, crop failures have hit or are threatening to a hit a number of very important food producing regions all at once. Most notably Australia, Southern U.S, and China.

    These crop failures are being made worse by the fact that China, the U.S, and many other countries no longer maintain the large grain stockpiles that they use to keep. It was decided that such large grain stockpiles were inefficient. Especially in a global food market where it was thought that if one region did poorly, they could just buy from the other regions.

    With the exception of the crop failures, all of these problems have been building for years. But America was largely shielded from these problems because of the rising dollar. In fact, it was not that long ago that some American farmers were complaining that they were loosing market share on the world food markets because of the high dollar.

    Needlessly to say, that is changing.

    Now that the dollar is dropping, almost the whole world is finding it cheaper to buy food that was grown in America then it was a year ago. Conversely, it is more expensive for Americans to buy food from other parts of the world then it was a year ago. So if you add together the increased demand for American foodstuff with the increasing cost of buying foreign foodstuff, and you have got a major increase in food prices expressed in dollar terms. And this increase is coming on top of the other factors that I already talked about.

    I don’t know which of these factors or combination of factors the people quoted in the Wall Street Journal article were referring to. But the problems go way beyond the isolated crop failure.

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