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Food Price Rises Could Continue For Some Time

By Debbie Carlson Kitco News
Thursday February 27, 2014 11:25 AM

(Kitco News) - Prices for food – from coffee to cattle – are rising, and the gains may continue for some time, say agricultural experts.

Droughts in different parts of the U.S. and in Brazil pushed up prices, but part of the gain in agricultural prices results from the value of many commodities markets being down sharply in 2013, so some of the rise comes from a low base.

Regardless, agriculture experts said agricultural commodity prices could be on the upswing for some time, which will trickle into retail prices, but much of the effect might not be felt until later this year or early 2015. There may be an uptick in food inflation at that time, but they said it’s unlikely to have as much pressure on overall inflation since food costs remain a fraction of total costs in the U.S., they said.

This year, the leader of the agricultural commodities rally is coffee, which is up about 55% since 2014 started. A savage drought in Brazil is withering coffee trees.

“The weather in Brazil is really (unusual). You don’t see drought there in January and February as that’s when it’s the rainy season. It’s really unheard of,” said Shawn Hackett, president of Hackett Financial Advisors.

Brazil is a powerhouse agricultural producer; it’s a top grower of Arabica coffee, sugar, oranges, cocoa, cotton and soybeans. And it’s those commodity markets that are rallying now. Coffee is the leader, but year-to-date soybeans are up 8.5%, cocoa is up 6.4%, orange juice is up 4.9% and sugar is up 3%.

Hackett said it’s important to put the agricultural markets rallies in context. Like gold, agricultural commodities suffered sharp losses in 2013, with some down 50%. It was nearly three years of a bear market for some agricultural commodities, Hackett said, noting that March would have been the three-year mark. Three years is historically when agricultural commodity cycles turn.

“Essentially we had run out of time,” Hackett said. “So based on history you would have expected a turn in the first quarter, but along came this catalyst” of the Brazilian drought.

Hackett said agricultural commodity markets, particularly the tropical softs markets, are likely to be upside price leaders for a while.

“Once these markets turn after such a severe bear market, the upside can be as equally exciting and the upside can last up to a year, possibly two, depending on the market you’re in…. The bottom line, I think the agricultural markets, you’re dealing with a major bull move…. We’re clearly in the early stages of an up move.

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Food Price Rises Takes Time To Work To Consumers

Prices are rising now and worries about droughts are grabbing headlines; however, Hackett said it takes time for prices to make their way through to consumers.

“Companies do not live hand to mouth on their ingredient costs,” he said.

An example of how long it takes for food prices to work through to the retail end can be seen in meat prices. Livestock prices have been on an upswing for a while, but their recent rallies started in mid-2013 and have continued to now.

The rise in meat prices is the aftereffect of the U.S. Midwestern drought of 2012, when ranchers slashed cattle herds because they couldn’t afford to keep the animals fed. These rising livestock prices are finally showing up at the meat counter. The reduction in herd size then is having ramifications now as there are fewer slaughter-ready cattle ready for the dinner plate, so the few that are ready fetch higher prices.

Ken Morrison, editor of newsletter Morrison on the Markets, said cattle and beef prices are likely to stay elevated for a long time. He said the U.S. Department of Agriculture is forecasting a 3% to 4% increase in beef prices at the consumer level as USDA is also forecasting a 5% smaller cattle herd for 2014, which is already at a 63-year low.

It’s going to take a long time to start rebuilding the cattle herd, as Morrison said a lack of forage and good grazing land kept producers from expanding herds, compounding the problem. “They haven’t put up young (cattle) in any meaningful rise. It’ll likely be 2015 before we see any beef supply rises,” he said.

The California drought could have an impact, too, although most of those agricultural products aren’t necessarily traded on commodities exchanges. Morrison said in the case of California, the prices of fruits and vegetables will be most affected.

Bill O’Neill, principal at LOGIC Advisors, said the drought there will drive up costs in other areas of a consumer’s food bill.

“Food inflation could be a very big deal, especially toward the end of 2014 into 2015,” he said.

Hackett concurred about future food prices in general.

“I’d hardly call what we’re seeing now food inflation. But I think we’re at the beginning of food inflation becoming a much bigger problem later in the year, if things transpire the way they normally do after such a severe bear market,” he said.

However, both O’Neill and Hackett said while the impact at the grocery store may be large, the size of food costs on the overall inflation gauge is minimal.

“We don’t have labor pressure and we don’t have rising wages,” O’Neill said, so inflation gauges might not rise that much.

Hackett agreed, saying that energy costs have a bigger impact than food. The Federal Reserve will look at higher food costs in the bigger picture, he noted.

“The Fed is more focused on the value of the dollar…. They’ll also see these food costs are a weather event and a temporary factor,” he said.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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