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Rising Food Prices Are Taking Their Bite

7 April 2014 in Trading Ideas

One of the wrinkles of the current economic recovery is that overall wage gains have been continually playing a game of leapfrog with inflation.

The good recent news for blue-collar workers is that since the last quarter of 2012 nominal hourly wage growth has accelerated while inflation has slowed.1

However, that outperformance means little when you single out the rising cost of food.

The Bureau of Labor Statistics announced recently that food prices rose 0.4% in January (the most recent reported month) – its highest monthly increase since September 2011. Beef and veal shoppers, for example, were hit with some of the biggest increases, as prices surged 4% since just a month earlier.2

 

A host of external factors have converged to push up costs. As USA Today recently noted, droughts, unusually cold weather, rising exports and virus outbreaks have all contributed to food inflation, which is expected to accelerate in 2014. The Agriculture Department expects grocery store prices to increase as much as 3.5% this year, well above last year’s rise of 0.9%.

One possible investing bright spot to this development has been the recent rise in the stock prices of companies that could be expected to gain as food prices increase. The Rising Food Prices motif has lost 0.5% in the past month; the S&P 500 has lost 1.7% in the same time frame.

In the past 12 months, the motif has increased 11.5%. During that same period, the S&P 500 is up 20.4%.

Food prices also seem to be rising across food groups. The average retail price fresh beef last month climbed to $5.28 a pound, its highest price on records dating back to 1987. Midwest ranchers have thinned their cattle herds after droughts in 2011 and 2012 shrank pastures, USAToday said.

In addition, the beef business is still recovering from the 2007-2009 recession, which saw a number of shutdowns by small ranchers. As it stands, the current count of 88 million head of cattle in the US is the smallest herd since 1951.

Meanwhile, the average price of a gallon of milk grew to $3.56 in January, due to a surge in exports to China and other Asian nations. USAToday cited one consulting firm saying retailers have been hit by a 36% wholesale price increase since December and expects per-gallon retail prices to rise another 25 cents to 50 cents this year.

Finally, environmental factors have had their way with fruits and vegetables. Unusually cold weather and a “greening” disease in Florida have damaged citrus crops. Orange prices rose 3.4% in a month, while strawberries were up more than 12%. An analyst cited by USAToday said prices for other fruits and vegetables could spike this year depending on the damage caused by the drought in California.

The rest of the year could certainly mean more of a pinch for consumers – along with an intriguing investment opportunity for those siding with expectations of higher food prices.

1Jared Bernstein, “Wage Gains for Middle-Income Workers Are a Good Sign, Not a Threat,” nytimes.com, March 7, 2014, http://economix.blogs.nytimes.com/2014/03/07/wage-gains-for-middle-wage-workers-are-a-good-sign-not-a-threat/?_php=true&_type=blogs&_r=0, (accessed April 1, 2014).

2Paul Davidson, “Rising food prices bite into household budgets,” usatoday.com, March 19, 2014, http://www.usatoday.com/story/money/business/2014/03/18/food-prices-rising/6557417/, (accessed April 1, 2014).

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