Saving for that rainy day

So what is the forecast for food inflation? One of our needs, not wants.

The agriculture total return index on the Dow Jones [an ETF] is down 20.16% on a year ago.  This suggests that there is an expectation that the returns within listed companies in agricultural segments in the USA are going to drop in the near term or should have already.  This belies the reported data of the USDA that I reported here, where it showed that farm gate takings have increased over 2011. Of course that is not comparing apples with apples, but it does suggest that focussing on the part of the agricultural value chain that is making the money is critical.  

Another important forecast is that farm inputs, which are reliant on commodity prices especially oil, have been falling and that this will do two things.  Either increase the returns to farmers if prices stay constant or, (more likely) the prices of agricultural commodities will drop.  This of course doesn’t mean that the farmer’s returns will fall, because their costs are also falling with the prices on their produce. However when we consider the price of crude oil, it remains elevated and rising, and oil prices and food prices have a strong co-relation.   

FAO Food Outlook, November 2011 sees the food inflation remaining benign during 2012, after allowing for a necessary increase in production to meet rising demand. It also says:  “However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required.”

It also reports that the cost of food purchases to the least developed economies have increased 30% in 2011. 

In other news, it is reported that India’s annual food inflation had dropped to 9% in November, but turned negative in December 2011.  However, this could be relative to the very high peaks of the previous corresponding period.  

Inflation remains high in southern Africa as food pressures remain high.

Quoting The Grocer Magazine, the BBC reports that groceries in the UK today cost one thirteenth of 150 years ago, and represents approximately 10% of income vs 30% back then.  Of course that 30% is what the vast majority of the world population continue to pay. 

And the US reports that food price inflation has dropped to 4.6% in November compared to 4.7% in October. This is after one of the highest food price inflation years on record.

For much of developing Asia, food is an important part of the household income, ranging between 30-40%.  So food price inflation is a major problem when it arises, and hence the riots in Thailand in 2008 when rice prices peaked.  

So when you read about falling inflation in 2012, as forecast by nearly everybody, there are several things to remember.  First, that is not good news, because the slower inflation overall may not reflect price of food inflation.  Second, even a slower rate of inflation in food, should it occur, is still occurring on a higher base rate in the first place.

It is further bad news because inflating food prices, in most countries are well above income, or wage, inflation.  By which is meant, wages and returns on investments are not rising at the same inflationary pace as food (except in China and other boom economies).  And the gap continues to widen. 

Food inflation is here to stay, as the growing middle classes in the new global boom economies switch their consumption ingredients to more protein dense food.  That's why we have a spending strike in most developed economies. 

People usually save more when they think that prices are going to fall.  That is, a recession, and the costs of goods are going to be lower in the future than they are today.  In the converse, they also save when they know that the price of things that they will need to buy - such as food, energy and health services - in the future are going to increase faster than their wages.  Saving for that rainy day is the new mantra.