Sunday, January 23, 2011

Agflation Goes Retail

We’ve been writing about it for several months (years, actually, but who’s counting) and now it’s finally starting to show up on the consumer side of things.
Up until last month or so, the price explosion on global commodity markets wasn’t being felt by retail buyers of food stuffs, but that is about to change - in fact, it’s changing right now.
Remember this chart, which we published a few months back in The Real Rate of Inflation?
In April of 2010 we wrote about some seemingly minor blips in month over month food inflation, suggesting that we could potentially see a rise in food costs of about 25% within a year.
Zero Hedge points out that those food cost increases are now here:
After denying for months that surging food prices will eventually come to the consumer, hoping that instead food companies could absorb the margin drop, sellside research is finally capitulating to the reality of what is really happening in the retail store. In a note discussing General Mills, Goldman Sachs says the company raised prices on snack bars some 7% last week. Goldman further clarifies that “this reportedly followed a comparable increase taken by K on its snack bars in mid-December. In addition, KFT has reportedly announced a 6% increase on select Planters branded nut products. We expect more price increases to be announced by the food  companies in the coming weeks.” Maybe, but the Chairman sure doesn’t. And the Chairman is always 100% correct.
The margin compression we discussed in Broke and Hungry is finally proving to be too much for major food producers. Their costs for ‘raw’ materials have gone up significantly, yet they did not raise their prices to compensate in the hopes that prices would stabilize. Those companies need to make a profit to operate, and it looks like they don’t think core commodity prices are going down anytime soon. As such, they will now be raising their prices to offset their production costs.
This reality is about to hit consumers smack-dab in the face:
Compared to a year ago, a pound of bacon costs 44% more at the retail level, sliced deli ham is up 11% a pound, and a dozen eggs cost 3% more, according to the latest informal data complied by the American Farm Bureau, which surveys U.S. supermarket prices in 29 states.
A caffeine jolt will hit your budget, too. The price to buy a pound of ground roasted coffee costs $4.47, up 22%, or 80 cents a pound from a year ago, according to the Bureau of Labor Statistics.
Rising commodity prices for everything from coffee to sugar are driving up grocery bills. Among the culprits: Rising demand from emerging economies, bad weather hitting crops worldwide and investor speculation.
Of course, there are some food manufacturers who, rather than outright raising prices on the foods you’ve become so accustomed to buying cheaply, are taking a different approach:
ConAgra, General Mills, Kellogg’s and Kraft recently raised prices for many of their wares. In December ConAgra, which makes Slim Jim meat snacks, among other delicacies, reported a 16% decline in second-quarter profits. Like other food makers, ConAgra is experimenting with smaller packages sold at the same price.
Less food for the same price. Those who aren’t paying attention will argue that they paid the same for their groceries this week as last, but the reality will be that they came home with 20% to 30% less food.
Take steps now to prepare for those rising costs and Buy Commodities at Today’s Lower Prices, Consume at Tomorrow’s Higher Prices.
Author: Mac Slavo
Date: January 21st, 2011
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