Why Food Prices Are Soaring, Likely To Continue

Why Food Prices Are Soaring, Likely To Continue by Gary D. Halbert

June 3, 2014

FORECASTS & TRENDS E-LETTER

IN THIS ISSUE:

1. Consumer Food Prices Are Skyrocketing

2. 10 Fastest-Rising Food Prices at the Supermarket

3. California is in Big Trouble! So Are We All

4. Drought Monitor Chart For Continental US

5. Incurable Disease Threatens Florida Citrus Crop

6. Latin America Coffee Blight Sends Prices Skyward

7. “The Solution to High Prices is High Prices”

Overview

Do you know that the US state which produces the most vegetables by far is going through the worst drought it has ever experienced? Do you know that the size of the total US cattle herd is now the smallest that it has been since 1951, even though our population has doubled since then? Do you know why bacon prices are up 55% or more in the last few years?

As you are no doubt aware, food prices are soaring higher and higher. As we’ll see below, one widely-followed food price index is up almost 21% in less than a year. The question is, why have food prices risen so sharply in the last few years? That’s what we’ll talk about today.

Soaring food prices are largely due to bad weather over the past several years. Droughts across much of the Western US and Texas pushed grain prices to record highs in recent years, boosting feed costs and forcing ranchers to pare back their herds. That, in turn, has significantly increased the cost of meat and dairy products across the country.

The prices of many vegetables and fruits have also shot up as a result of the severe drought in California and dry weather across much of our country’s agricultural heartland over the past few years. In addition to severe droughts, new incurable (so far) diseases are ravaging our hog herd and crops in Florida, Latin America and elsewhere.

If drought and disease that have been devastating farmers and ranchers continue, we are going to see prices for meat, dairy, fruits and vegetables soar even higher than today’s levels. Already, the federal government has declared portions of 11 states to be “disaster areas,” and California farmers alone are believed to have left up to 800,000 acres (7%) sitting idle this year because of the extremely dry conditions and lack of water.

Consumer Food Prices Are Skyrocketing

The graph below shows the CRB/BLS Foodstuffs Index which tracks the spot price of 10 agricultural commodities: butter, cocoa, corn, hogs, lard, soybean oil, sugar, Minneapolis wheat and Kansas City wheat. Since touching a 1-year low on December 19 last year, the Index has shot up by nearly 21% to a new 1-year high since then.

Food prices are often volatile and are affected by a number of factors. While certain factors reflect human decisions – such as the changing tastes of consumers and farmers’ planting choices – others are forces over which farmers and ranchers have very little control. Issues such as weather conditions and diseases can cause severe supply shortages that cause the price of products to rise.

As we will see below, a multi-year drought across much of the west has sent prices soaring for meat, dairy, vegetables and fruit. In addition, a relatively new hog virus – Porcine Epidemic Diarrhea Virus (PEDV) – can be deadly to newly-born pigs, and has cut into hog production significantly. As a result, bacon is the fastest rising food price on the market.

The 10 Fastest-Rising Food Prices at the Supermarket

Here are 10 foods that have risen the most in price over the last few years based on April prices, as measured by 24/7 Wall St./USA TODAY:

1. BACON 4-yr. change: +53% Current price: $5.55 lb.	6. MARGARINE 4-yr. change: +30% Current price: $2.11 lb.
2. GROUND BEEF 4-yr. change: +35% Current price: $4.13 lb.	7. WINE 4-yr. change: +25% Current price: $10.71 liter
3. ORANGES 4-yr. change: +35% Current price: $1.21 lb.	8. TURKEY 4-yr. change: +24% Current price: $1.73 lb.
4. COFFEE 4-yr. change: +31% Current price: $5.00 lb.	9. CHICKEN 4-yr. change: +22% Current price: $1.54 lb.
5. PEANUT BUTTER 4-yr. change: +30% Current price: $2.71 lb.	10. GRAPEFRUIT 4-yr. change: +22% Current price: $1.02 lb.

Some of these foods have continued to go up in price since the April figures quoted above, in some cases significantly higher. As the primary cook in the Halbert household, I’m in our local supermarket several times a week, and am well aware of these price increases and others.

I’m sure that most of you know that food companies are cutting down the quantity of food in their packages while leaving the prices unchanged, hoping that consumers won’t notice. Be sure to check the labels closely. A lot of formerly 16-ounce packages now contain only 12 ounces, but the price is still the same. Be smart!

California is in Big Trouble! So Are We All

The Golden State is in the midst of the worst and longest drought on record. 2013 was the driest year ever recorded for the state, and 2014 has been exceptionally dry so far as well. In times of drought, crop production falls significantly. Decreased availability of above-ground and below-ground water sources most often result in a reduction in the number of acres planted.

California depends heavily on the snow pack in the Sierra Nevada mountains. As the snowpack melts each spring, much of it makes its way into CA streams, rivers, lakes and eventually into its vast underground aquifers. Unfortunately, this winter’s snow pack was only apprx. 15-17% of normal. Take a look at this drought map:

As you can see, the entire state of CA is in one stage of severe drought or another. This is the third year of drought in many areas. About 25% of the state is in “exceptional drought,” the most severe rating. Over three-fourths of the state is in “extreme drought,” the next most severe. The rest is in “severe drought.” Some climatology experts fear that this drought could go on for several more years.

So far this year, rain across most parts of California has been minimal and the rainy season is over. With the exception of a brief period in early February, the growing regions have been mostly dry. Making matters worse, a strong high pressure system developed and brought a record-breaking early-season heat wave to much of the state.

A number of daily high temperature records were set over a multi-day period over a geographic region spanning the far North Coast (near Eureka/Arcata) to the Mexican border (including San Diego County). Remarkably, the afternoon high temperature recorded at the San Francisco Airport on April 30th was higher than any recorded temperature during all of calendar year 2013.

This spring’s heatwave also coincided with the occurrence of powerful Santa Ana winds in Southern California, with the typically windier mountain peaks seeing gusts in the 100 mph range. These high winds – combined with ongoing extreme drought conditions – led to extreme fire weather conditions, and several wildfires did ultimately break out. It could be a very long summer for CA’s firefighters.

In the meantime, many of CA’s farmers will have to rely on pumping an estimated five million acre-feet of groundwater from underground lakes, known as aquifers. The aquifers are a relic of the era when the Pacific Ocean covered much of the state. California has over 850 million acre-feet of water stored in 450 known groundwater aquifers.

Unfortunately, drilling deep wells and pumping water out of the ground are both very expensive. This added cost will have to be passed on to consumers. Also, there are concerns that pumping too much water out of the aquifers can cause the ground to sink, thus reducing the aquifers’ storage capacity.

America is Very Dependent on California’s Crops

Our entire nation is extremely dependent on the fruits and vegetables grown in California. Consider the following statistics from the California Department of Food & Agriculture regarding what percentage of our nation’s produce is grown in the state:

These numbers are simply staggering when you consider that CA is currently in the third year of the worst drought on record!

Drought Monitor Chart For Continental US

Now let’s take a look at the Drought Monitor map for the continental US. As you can see below, in addition to exceptional and extreme drought in California, similar conditions exist in parts of Texas, Oklahoma, Kansas, Colorado, New Mexico, Nevada and elsewhere.

This definitely includes the Austin, Texas area where we live. Our beautiful Lake Travis that we call home is currently only 38% full or about 45 feet below normal. Parts of this 65-mile long lake have been dry or almost dry for over two years.

Incurable Disease Threatens Florida Citrus Crop

Florida’s citrus industry is grappling with the most serious threat in its history: a bacterial disease with no cure that has infected all 32 of the state’s citrus-growing counties. Although the disease, called “citrus greening,” was first spotted in Florida in 2005, this year’s losses from it are expected to be by far the most extensive.

The bacteria cause fruit to turn bitter and drop from the trees when still unripe. While the disease affects all citrus fruits, it has been most devastating to oranges, the largest crop. So many orchards have been affected that the United States Department of Agriculture has downgraded its crop estimates five months in a row.

Florida’s citrus growers are fighting to keep their trees alive. Since 2005, when the deadly citrus greening disease was first discovered in Dade County, it has become the single largest threat to Florida’s entire $9 billion industry.

The exotic disease, carried by the microscopic Asian citrus psyllid, kills the tree’s entire root and branch system and doesn’t allow fruit to grow beyond the green stage. The scarred fruit usually falls off the tree and rots on the ground before it can be harvested.

Ten years ago, growers harvested over 200 million boxes of citrus throughout Florida, but today that number is almost cut in half. As noted earlier, retail prices for oranges have soared 35% over the last four years and depending on this year’s harvest, prices could go even higher.

Michael Sparks, CEO of the Florida Citrus Mutual in Lakeland, Fla., says that the entire industry is in a chokehold. “To think that we would lose Florida citrus is almost unthinkable. At the end of the day, that’s the battle we are battling,” he said. “Nothing has been this devastating to the Florida citrus grower.”

At the USDA research lab in Ft. Pierce, Fla., David Hall and a team of scientists are hard at work looking for a cure. “We’re working 10 to 12 hours a day, we’re working weekends…right now, it’s our life. It’s the toughest problem that I’ve ever been exposed to and, I guess the jury is out as to how soon we can deliver a solution.”

Florida is the second-largest producer of orange juice in the world, behind Brazil, and the state’s $9 billion citrus industry is a major economic force, contributing 76,000 jobs.

Latin America Coffee Blight Sends Prices Skyward

As shown in the food price chart above, coffee prices have exploded by over 30% in the last few years. A fast-spreading fungus has swept coffee fields from Mexico to Peru, which has stunted production and driven up the price of Latin American roasts.

Especially hard hit have been Central America’s “arabica” coffee plants, which produce high-quality beans used in espressos and gourmet specialty blends that are in growing demand in the United States and elsewhere around the world. US foreign aid officials say the fungus has already caused over $1 billion in damage to coffee plants.

The so-called leaf rust, or “roya,” is a yellow and orange-colored fungus that chokes off the source of nutrition to the trees, causing them to produce fewer coffee cherries – the seeds of which are coffee beans. This blight is jeopardizing the livelihood and food security of about 500,000 people who make their living in the coffee industry, especially small farmers and seasonal workers, according to the U.S. Agency for International Development (USAID). Currently, there is no known cure for this fungus, which can be lethal for certain varieties of coffee plants in Central America.

“The Solution to High Prices is High Prices”

Most readers will not know this but I began my professional career after graduate school as a commodities trader for one of the largest agricultural firms in the world. It didn’t take long to understand that commodity prices have a historical tendency to rise and fall to extremes periodically.

There is an old adage in the commodities business that says: “The solution to high prices is high prices.” What does that mean? If the price of a given commodity rises high enough, then the producers of that commodity will increase production significantly, hoping to maximize profits. However, the super-high prices are simultaneously killing off demand, just as producers are ramping up the supply. So, super-high prices don’t tend to last a long time.

The same outcome typically occurs when prices get too low: “The solution to low prices is low prices.” If a given commodity price falls low enough, producers will cut production significantly – at the same time that the low prices are generating more demand from consumers. So, super-low prices don’t tend to last a long time either.

While both of these commodity adages are generally true, and might suggest that food prices won’t remain this high for long, there are two BIG differences in today’s food price situation:

People have to eat and the world population is still growing rapidly; and
We have no idea how long the current droughts and diseases will last.

Farmers with no water cannot increase commodity production, regardless how high prices rise. Likewise, producers whose crops and/or livestock are ravaged by disease cannot increase production unless or until cures are found.

I’m not suggesting that today’s soaring food prices are here to stay. What I am saying is that the reasons for today’s record-high food prices are largely NOT within our control. We simply cannot control Mother Nature.

As a result, food prices could remain high (maybe even higher in some cases) and for longer than the typical commodity price cycle lasts. Let’s hope not!

Finally, if you want my analysis of last week’s surprisingly weak 1Q GDP report, see my BLOG posted last Thursday.

Best regards,