05/02/2010

Consumer Food Inflation Remains Absent, While Wholesale Food Prices and Underlying Commodity Markets Accelerate

Consumer food inflation (CPI-Food) has remained benign since late 2009, reflecting the declines in wholesale food prices during 2008-09, as well as weaker economic conditions. The CPI-Food rose by a modest 0.2% during March 2010, the first increase in the food inflation since August 2009. By contrast, wholesale food prices (PPI-Food) have begun to accelerate. The PPI-Food rose by 6.8% during March 2010, following a 3.4% increase during February. The rise in wholesale prices reflects a sharp increase in underlying commodity costs – the AES index of commodity prices has risen by 16% from a year ago. While inflation is currently absent, consumer food prices are forecast to rise by 4.5% (vs. year ago) by the end of 2010 – the third highest rate posted in the past 20 years. This compares to a decline of 0.5% during 2009, and gains of 4.9% and 5.9% registered during 2007 and 2008, respectively. The gain in consumer food prices is expected to be driven by higher costs of wholesale and underlying commodity inputs, most notably protein, dairy and soft commodity prices. However, it is also important to recognize the important role that economic conditions played in driving consumer food prices – both in pressuring food prices lower during 2009 and likely supporting higher rates of food inflation during 2010.

PPI –Food: The government’s report on wholesale prices is released around the middle of the following month, and reports on the change in a broad range of prices. For March, the index of wholesale food costs surged 6.8% from a year ago. The sharp rise in wholesale prices includes 6 of 20 items rising by more than 10% from a year ago. Most notable is the gain in fresh vegetable prices – up 56% from a year ago and rising a remarkable 49% between February and March. While the PPI data provides only single fresh vegetable numbers, the USDA monthly average farm prices do include reveal detail that shows the rise in prices from a month ago: onions +129%, cauliflower +100%, lettuce +75%, broccoli +74%, tomatoes +61% and celery +25%. Note that while fresh fruit prices actually declined from February to March, they remain 29% above a year ago. Wholesale prices of both beef and pork are also up sharply from a year ago, consistent with the sharp gain in live cattle and live hog prices. These increases reflect both the beginnings of a recovery in demand, rising exports, and reduced production. Wholes sugar prices during March were 17% up from a year ago, with refined sugar prices, now reported at over $.53. The PPI for eggs was reported to be 34% above a year ago, but declines thus far during April suggest some decline in wholesale prices should be anticipated in the next report. Dairy prices are 10% above a year ago, but larger gains are possible during the coming months, due to limited gains in production as well as a sharp recovery in dairy export demand.

Commodity Price Trends -- The table below provides commodity price information as of April 12, 2010, along with historic comparisons. This gives an indication of commodity price trends, both short-term and longer-term. The AES index, listed at the top, represents an average of the items listed below, index to 2000=100. The AES Food Input Cost Index is now 16% above a year ago, and has risen by 8% over the past six months. The largest increases have occurred among the packaging materials (resins and linerboard), sugar, and cocoa. Nearly all commodity prices have rebounded sharply since early 2009. More recently the main area of strength in commodity prices has been in the beef and pork markets. This largely is the result of reduced per capita meat supplies, rising export demand, and improvement in the US economy. Supply/demand factors for each commodity remains important as price drivers, but changes in the value of the US dollar and crude oil prices will continue to play an important role in price direction over the next year.

CPI-Food – The government reported consumer food prices (CPI-Food) rose by 0.2% during March (vs. year ago), following modest declines over the past five months. This includes a 0.7% decline in the price of food at home and a 1.2% gain in away from home food prices. It is worth noting that consumer prices for nearly all categories of proteins and dairy continue to register year-over-year declines. This downward trend in these categories is expected to reverse, potentially dramatically in the coming months. Wild swings in the wholesale price of major inputs have been a primary driver of changes in consumer food inflation – the recent rise in the PPI-Food and underlying commodity prices will be supportive to higher consumer food inflation as 2010 progresses. The higher wholesale costs, combined with an improving economy, are expected to result in consumer food inflation (CPI-Food) rising at a 4.5% rate by December 2010.

Bill Lapp