Ag-flation

You know something weird is going on when two of the largest retailers in the US are restricting the purchase of RICE. Both Costco and Wal-Mart limited consumer purchase of the grain, due to what Costco called “recent supply and demand trends.” This sounds like a story out of the former Soviet Union, circa 1975, not from American the Beautiful.

Evidently the rice issue has something to do with Vietnam and India, two large rice exporters, but the trend is disturbing across the globe: as agricultural prices soar, retailers like Costco and Wal-Mart do not want to promote a run on all of their inventories. But as soon as the stores impose a limit, the natural inclination is for consumers to want to buy more simply to hoard what appears to be a valuable asset, even if they do not need the items. Unfortunately, that cycle is tough to break once it starts.

The rice incident is a mere scuffle, when compared to the riots erupting in certain parts of the world, as food availability comes under pressure. Accelerating food prices are a global phenomenon, have recently intensified, and the sources of the increases are global in scope.

U.N. officials recently noted that there was a perfect storm of problems that created the current crisis, but specifically, the growing demand from India and China’s rising middle class after years of tremendous economic growth and the divergence of US corn crops to ethanol production, have pushed prices higher -- the S&P GSCI agricultural commodities nearby index jumped by over 80% over the past 14 months.

Many are hoping that inflation will recede, as the US economy contracts. After all, if the world’s number one consumer is pinched in the pocketbook, it is likely to effect prices. Despite the recent headlines screaming about rice rations and how certain restaurants are now charging for sour cream due to rising prices (who needs those extra calories anyway?), the above-mentioned agricultural index has tumbled by 10.5% from its mid-March peak.

While I think that in the near term, we could see some of these prices fall a bit, it is disconcerting that the factors that have pushed up food prices are still in play and likely will be around for a while. Strong global demand from the developing world, rising living standards and associated demands for protein in the developing world; and the rise in energy costs that drives up both fertilizer and transportation costs for food producers, are all likely to keep ag-flation on the radar screen for some time to come.