naked capitalism

Although food inflation has been hard to miss (just go to a grocery store), it’s getting worse. Inflation in cereals, which drives the costs of other foodstuffs, is accelerating. Bloomberg reports that wheat has just risen to over $10 a bushel as corn and soybean prices are spiking; the Financial Times has a series of articles today on food price inflation.

The wheat price increase is the result of poor harvests, but that in combination with pressure on corn supplies due to its use for ethanol as well as food is leading to a reduction in supply in key grains as demand increases relentlessly.

From Bloomberg:

Wheat rose above $10 a bushel for the first time and soybean and corn prices surged, fueling inflation that’s threatening to derail global growth.

Chicago wheat futures jumped by the exchange-imposed daily limit to $10.095 a bushel as dry weather threatened crops in Argentina, renewing concern that farmers may fail to supply enough to meet rising demand. Soybeans advanced to $11.9225 a bushel, the highest in 34 years, and corn rose to $4.4325 a bushel, a nine-month peak.

Food companies such as Kellogg Co. and General Mills Inc. have raised prices because of higher wheat costs, which are stoking inflation and making it more difficult for the world’s central bankers to lower interest rates. Sara Lee Corp. said Dec. 13 it will increase bread prices for a second time since September to counter higher input costs.

“Global supply is really tight at this time,” Tobin Gorey, a commodity strategist at Commonwealth Bank of Australia, said from Sydney. “Saying there’s a near-term top in the price is a very dangerous thing to do.”….

Wheat for March delivery, the most-active contract, traded at $10.07 a bushel, up 2.8 percent, in after-hours electronic trading on the Chicago Board of Trade at 2:09 p.m. Sydney time. The price has more than doubled in the past year as adverse weather reduced output from Australia to the U.S. and Canada.

“There’s people saying potentially $11 or even $13,” Cooper said. “All things certainly point to a crack at $11 in the short-term. These things tend to move very quickly, so if the momentum is there, it could be some time this week.”.

The Financial Times article notes the role of long-term demand. From “World food price rises set to hit consumers“:

Global food prices will come under further pressure on Monday as benchmark prices for cereals at much higher levels come into operation, making it almost inevitable that a second wave of food price inflation will hit the world’s leading economies….

Knock-on price rises are set to hit consumers in coming months, raising inflationary pressure and constraining the ability of central banks to mitigate the slowdown in their economies.

A first wave of surging cereal prices hit the wholesale market during the summer and has fed through the supply chain and contributed to rising inflation….

Bill Lapp, analyst at US consultancy Advanced Economic Solutions, said: “We’ve already seen food prices increase this year at their fastest pace since the early 1980s, but the full brunt of those increases will begin in earnest in 2008.”

The agricultural commodities price rises are the result of high demand, poor harvests and low stockpiles of food. Emerging economies, where rising incomes are boosting consumption of meat and dairy products, have added to pressures already generated by the biofuel industry.

Cereal supply was this season lower than expected as several countries suffered weather-related losses. Jean Bourlot, head of agriculture commodities at Morgan Stanley in London, said: “High cereals prices are here to stay.”

The US Department of Agriculture has predicted that global corn stocks will fall to a 33-year low of just 7.5 weeks of consumption, while global wheat stocks will plunge to their lowest level in at least 47 years at 9.3 weeks.

The situation has gotten sufficiently desperate that many countries are cutting food tariffs.