Friday, September 30, 2011

Will Food Inflation Be A Continuing Problem Going Forward?

Consider the following charts of the grains when looking at inflation.

Above is a 25 year chart of wheat.  Notice that for nearly 20 years, it fluctuated in a range between 2.25 and 5.00 per bushel.  Now $5 is the floor of a new trading range that has seen spikes to over 13 bushel.

Soy beans traded in a range of roughly $4-$10 for roughly 20 years.  Now they trade in a range of $8 -$16.

Corn traded in a range between $2 - $2.50 for nearly 20 years whereas now it's trading in a range of $3.50-$7.50.  With corn, keep in mind that ethanol is helping to goose prices.

An old trading adage is the longer the base the better the rally or fall from the base.  Should that hold here, we've got 20 year bases from which to rally.  That's a pretty large base to rally from. 

Why the increase? Remember that the standard of living is increasing for billions of people in India, China, Brazil and Russia, meaning their respective diet is changing.  That means the global demand curve has shifted out (to the right), increasing prices.  Additionally, we've also had a year of really odd weather, starting with most of Russia being on fire last year.  My state (Texas) is in the middle of a terrible drought negatively impacting the cattle business.  This means supply is growing slowly.

In short, food inflation will probably be a story going forward, given the above charts.