Consumer Food Inflation Remains Modest

Wednesday, August 4th, 2010

Remaining consistent with the previous month, Consumer Food Inflation (CPI-Food) rose by 0.7% during June from a year ago. This increase is equal to last month’s reported gain and includes at-home food prices as well as away-from-home food prices. The CPI indicates an increase of 0.2% from a year ago in at-home prices as well as a 1.2% gain in away-from-home food prices.  By item, the largest gains were found in beef and pork, each rising by more than 4%. Consumer dairy prices also rose by nearly 2%, reflecting gains in wholesale dairy costs.

However, in spite of these reported gains in consumer protein and dairy prices, the CPI-Food remains relatively benign. Of the 18 items listed in the CPI-Food Detail below, 10 items reported year-to-year declines during June.  The underlying commodity market behind many of these items has been rising for several months.  However these costs are not yet being “pushed” through the food chain to the consumer in most cases.

For now, economic circumstances and the economic environment have become the dominant drivers of consumer food prices.  Until some of the economic metrics begin to improve, most notably unemployment and consumer confidence, consumer food price gains are likely to lag behind the gains already being experienced in wholesale costs. While higher rates of consumer food inflation are coming with higher input costs ultimately passed on to consumers, the most rapid gains in the CPI-Food may be deferred until 2011.

The BLS reports both “at home” and “away-from-home” sub-index values for the CPI-Food.  In calculating the index for the CPI-Food, at-home has a 57% weighting and away-from-home has a 43% weighting.   The history of the change in these two indices is shown in the table below.

Detailed item-by-item data for products consumed at home is collected and reported each month as can be seen in the table below.  By contrast, the BLS provides little detail regarding away-from-home dining.  While changes in prices at restaurants and other food service establishments are important to understand, the BLS data provides only limited directional guidance.

Bill Lapp

Advanced Economic Solutions

Meat Supplies Remain Tight, Driving Prices Sharply Higher

Friday, July 16th, 2010

US meat supplies have tightened significantly over the past three years.  Ordinarily such a reduction would be followed by higher prices, without much delay.  However with the US economy in recession and unemployment high during 2008 and 2009, the impact of reduced supplies upon prices has been minimal – until 2010.

In 2007, per capita meat supplies reached a record 222 pounds per person, however supplies have receded sharply  since – declining to 216 pounds during 2008, 211 pounds during 2009, and bottoming out at 209 pounds during 2010.  This decline reflects both poor producer margins, as well as weakening demand during this period.

With poor margins, livestock producers have been reducing output to match demand.  The USDA indicates that total meat production declined by 3.2% during 2009, including a sharp decline in broiler output (-3.8%) and smaller declines in beef (-2.2%) and pork (-1.5%).  During 2010, the USDA is forecasting total meat production will decline fractionally (-0.2%), with a rebound in broiler production (+2.7%) offset by additional declines in beef (-1.2%) and pork (-3.3%).  On a year-to-date basis, beef and pork production has declined by 1.0% and 3.8%, respectively; broiler production during the first half of 2010 is marginally above year ago levels (+0.5%).

Thus, while the economy is beginning to show signs of recovery, an overall expansion in supplies has yet to begin.  This is not uncommon, as the biological lags involved in livestock production, and thus protein availability, make it difficult to match supply with demand.  This is an important facet of the volatility of meat prices, one that has become clear over the past six months, as prices for most meat items has surged.

The pork cutout, representing the composite value of all pork cuts, has declined over the past month but remains more than 50% above year ago levels.  Similarly, beef prices surged 20% between January and May and remain 12% ahead a year ago even after easing over the past sixty days.  Chicken breast prices are currently 13% ahead of a year ago in spite of some modest expansion in broiler supplies.

Many protein items are highly seasonal, and peak in value between Memorial Day and Labor Day.  Thus some relief in prices is likely during September and beyond.  However, the overall tightness in supplies of livestock and protein suggests that for many cuts, prices are likely to remain well above year ago levels during the remainder of 2010 and into 2011.

Bill Lapp
Advanced Economic Solutions, LLC

USDA Estimates Winter Wheat Crop

Monday, May 24th, 2010

On May 11, 2010 the USDA issued their first official estimate of the 2010 US winter wheat crop.  Additionally, the USDA published their supply/demand estimates for major crops, which included US wheat.  Assuming normal weather conditions, the initial USDA estimates suggest that stocks of wheat will be ample through the 2010/11-crop year.  It’s important to remember that a lot can change over the next 18 months in terms of production and demand.  For now however, the USDA supply/demand estimates for wheat imply no supply related problems during the coming year.

As of May 1, 2010 the USDA has forecast a 2010 total winter wheat production of 1458 mm, down 4.3% from last year’s crop of 1523 mm bushels.  This forecast reflects an 8% decline in harvested acreage – the USDA survey indicates planted acreage for 2010 is off by 13%, but above normal harvested acreage (as percent of planted) results in a narrower decline in acreage harvested.  The overall winter wheat yield is pegged at 45.9 bushels per acre, compared to 44.2 last year.  The key drivers of these higher yields can be attributed to rebounds in the expected yields in key hard red winter (HRW) wheat states.

The HRW crop is projected at 960 mm bushels vs. 919 mm YA.  This increase is due in large part to higher yields compared to a year ago in TX (35 vs. 25), OK (33 vs. 22) and SD (49 vs. 42).  The largest HRW state, Kansas, is forecast to have yields unchanged from a year ago, however the Kansas forecast includes a 7% decline in production to 344 mm bushels.

The SRW crop is pegged at 283 mm bushels vs. 403 mm YA. This sharp 30% decline reflects a significant decrease in the planted acreage.  White winter wheat (which typically represents 80-90% of total white wheat production) is forecast to total 215 mm bushels, a gain of 7% from a year ago on larger planted acreage.

The USDA will provide an updated forecast of winter wheat production on June 10, 2010 and again on July 9, 2010 with adjustments to the crop total to reflect changes in conditions.  The USDA’s first official (survey-based) forecast of 2010 US spring wheat and durum wheat will be released on July 9, 2010.

Bill Lapp, Advanced Economic Solutions

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

Sunday, May 2nd, 2010

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

Summary of USDA’s March 31 Prospective Plantings Report

Thursday, April 8th, 2010

The release of the USDA acreage estimates for 2010, the “Prospective Plantings report”, provides the first survey-based estimate of US acreage planted for harvest during 2010 (and an update of farmer’s winter wheat planting intentions). The survey provides helps develop guidance and expectations for the forthcoming 2010/11 crop year. Total acreage declined from a year ago, with a sharp decline in winter wheat area offset in part by an expected increase in corn, soybean, spring wheat and cotton area.

USDA’s estimate of 2010 corn area was 88.8 mm acres, a gain of 3% and the 2^nd largest (2007 93.5 mm) in over 50 years. Based on a normal percent harvested (91.5%) and trend yields (159 BPA) implies a 2010 US corn crop of 12.9 B bushels – close to the record 13.1 B bushels produced during 2009, but short of projected 2010/11 usage of 13.5 B bushels. The survey has an average error (up or down) of 1.1 mm acres, and with cooperative weather, it would not be unreasonable to expect an upward revision in 2010 US corn acreage. Given the projected crop of 12.9 B bushels and usage of 13.5 B bushels, stocks at the end of the 2010/11 crop year are projected to decline to 1.37 B bushels (10.2% of usage), down from 1.91 B this year (14.8% of usage). The results of this acreage report imply a modest decrease in stocks at the end of the 2010/11 (although weather and actual acreage planted remain risks).

The 2010 US soybean area is projected to rise to a record 78.1 mm acres – up 1% from a year ago but slightly below expectations. Using a trend yield of 43.0 BPA and normal percent harvested (98.5%), a 2010 US soybean crop of 3.31 B bushels is projected, off 2% from the record 2009 crop. With a record South American crop currently being harvested (35% larger than a year ago), US soybean demand during the 2010/11 crop year is expected to decline fairly dramatically. As a result, soybean stocks are projected to rebound sharply to 315 mm bushels (10.1% of usage) by the end of the 10/11 crop year, well above the 112 mm bushels (3.3% of usage) expected at the end of 09/10.

US total wheat acreage is forecast to decline to 53.8 mm acres, the lowest total since 1971. Winter wheat acreage is pegged at 37.7 mm, down from 43.3 mm last year but revised up .6 mm from the USDA’s January forecast (HRW revised up .5 mm to 28.3 mm vs. 27.8 YA; SRW revised up .1 mm to 6.0 mm vs. 8.5 mm YA; white at 3.4 mm vs. 3.5 mm YA).

Spring wheat plantings are larger than expected at 13.9 mm vs. 13.3 mm YA – anecdotally, the evidence would suggest this number will ultimately be revised down (note that average error in this estimate is .7 mm acres). This includes HRS acreage at 13.3 mm vs. 12.6 mm YA. Durum acreage is forecast to decline to 2.22 mm (vs. 2.55 YA), reflecting poor returns relative to other crops.

The net result of these acreage estimates is that with trend yields, a 2010 US wheat crop of 1946 mm is projected, down 11% from a year ago (2216 mm) and the smallest crop since 2006. By class this includes projections of HRW 829 (vs. 919), SRW 303 (vs. 404), HRS 485 (vs. 548), white 252 (vs. 236) and durum 76 (vs. 109).

The USDA will released their first forecast of 2010 winter wheat production, as well as their first official forecast of 2010/11 supply/demand for wheat on May 11. Stocks are expected to remain large – forecast to finish 09/10 at 950 mm, and declining only slightly to 851 mm at the end of the 10/11 crop year.

Bill Lapp

Consumer Food Inflation Remains Absent, Although Wholesale Food Prices and Underlying Commodity Markets Begin To Move Higher

Tuesday, March 2nd, 2010

Consumer food inflation (CPI-Food) has remained near zero over the past five months (compared to a year ago). However, wholesale food prices, as measured by the Producer Price Index (PPI), have begun to accelerate, rising by 1.5% from a year ago during January.

The price of a majority of underlying food commodities has been on the rise in recent months, with the AES index of 19 commodity prices up 15% from six months ago (as of mid-February). The higher price of commodities has traditionally been a lead indicator for trends in wholesale costs and ultimately consumer food inflation – suggesting a return to higher rates of food inflation over the course of 2010.

The government’s PPI food report on wholesale prices was released around the middle February, and reports on the change in a broad range of prices. For January, the index of wholesale food costs rose 1.5% from a year ago.

January’s PPI report showed wide variations in price changes (vs. YA). Most notable were fresh fruit prices, impacted by adverse weather in Florida, rising 44% above a year ago levels and up 20% during the past month. Wholesale pork prices rose by 12% from a year ago (+5% over the past month), consistent with higher commodity pork prices. Similarly, rising raw sugar prices led to a 15% in the wholesale price of sugar (vs. YA). Wholesale dairy prices remain 5% above a year ago, although they have eased in recent weeks. It is notable that beef prices rose month over month, but remain 3% below a year ago. While domestic protein and dairy demand remains soft due to high unemployment rates, reductions in supply and larger exports are expected to create a tighter supply and rising price environment during 2010.

The Commodity Price Trends table below provides commodity price information as of February 15, 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 20000.

The AES Food Input Cost Index is now 15% above a year. Until recently, the lion’s share of the gain has come from increases in the price of soft commodities, led by a 53% year-over-year gain in the price of sugar. Pork prices have been rising sharply, including a 41% gain in pork belly prices over the past six months.

Commodity prices rose steadily over most of calendar 2009. However since mid-November the AES Food Input Cost Index has been steady. The uptrend in prices stalled as the US dollar began to gain strength. The individual supply/demand factors for each commodity remains important as price drivers, but the changes in the value of the US dollar and crude oil prices will continue to play an important (if not dominant role) in price direction over the next year.

The government reported consumer food prices (CPI-Food) declined by 0.4% during January (vs. YA), following a 0.5% decline last month. This includes a 2.0% decline in the price of food at home and a 1.6% gain in away-from-home food prices. Declines in commodity prices, as well as high unemployment rates, have helped lead to the benign increases in food prices.

The downward pressure on food inflation rates from lower commodity prices has passed, and rising rates of food inflation should be anticipated as we move through 2010. Consumer food inflation is expected to reach 4-5% (year over year) by January 2010. Gains in wholesale food prices (PPI-Food) have already begun to show up, with more likely in the coming months. The primary driver of higher prices will be the underlying commodity prices, but the higher costs for packaging, freight and energy costs should also be anticipated.

Bill Lapp
Advanced Economic Solutions, LLC