This must surely mean my first attempt published in March couldn’t have been that bad after all!
Just when I was starting to get my head around the fact that I am now paying an increasing proportion of my modest income to my gas & electricity provider, I hear rumblings that lead me to believe I may have to allocate more of my hard earned cash to my local grocery store (well... more like my local supermarket giant who shall remain nameless!). Luxurious items such as potatoes, fresh vegetables, fish, eggs and milk cost me over 12% more now than a year ago. Extrapolating this forward, I can only assume that the average UK household, where spending on food and drink (excluding alcohol) accounts for roughly 10% of its budget, is not getting too much relief these days. The humble vegetable now seems to be posing a problem for the Bank of England too. Not only did the Bank of England miss its inflation target for the first time this year, it now has to concern itself with inflation, previously only seen in house prices, fuel and household goods, actually creep into such categories as ‘Food and non-alcoholic beverages’ – things people actually need to stay alive! And there are very ominous signs that food price inflation is about to rear its ugly head, not just in the UK but the world over, with the Financial Times actually stating this week that “Retail food prices are heading for their biggest annual increase in as much as 30 years”.
US Federal statistics show that food prices rose 3.9% year on year in April, while here in the UK prices leapt by 6% over the last 12 months. So what’s pushing up the price of our food? In the short term weather variability has certainly played a part. Late snaps of cold weather have destroyed vegetable and fruit crops while the hot Summer last year wreaked havoc on grain prices in the US and Europe. However, the broader trend to be noticed is the rising price of so called ‘soft commodities’. In the last three years, prices for industrial metals, precious metals and energy have risen spectacularly and now agricultural products feel it’s their turn to put on a show. Coffee and cocoa prices have risen to hit 8 year and 4 year highs respectively, while corn and wheat prices have reached their highest levels for more than a decade. (And just as an aside for all you beer swiggers out there who may be thinking of attending this year’s Oktoberfest beer festival in Munich – apparently the increasing cost of barley is pushing up the price of beer, forcing the organisers to announce a 5.5% increase, meaning a 1 litre mug will now cost up to $10.70!).
Apart from the usual rumblings of Chinese growth fuelling the need for commodities, both hard and soft, many are attributing the rise in food prices to the surge in oil prices and subsequent increase in ethanol and biofuels as a suitable alternative. The US Department of Agriculture reports that the current expansion in the use of corn for ethanol is unprecedented in its speed and magnitude. This translates into higher prices for corn, making it quite the golden crop! It is then a matter of connecting the dots to the cow, the chicken and the hog, the common denominator being the use of corn in animal feed.
Quite simply, the more corn used to make biofuels, the higher the cost of feeding said animals, and the higher cost of meat, poultry and eggs in our supermarkets.
Both the EU and the US governments are driving biofuels initiatives forward with the help of farming subsidies for corn. This provides farmers the incentive to increase corn acreage at the expense of other crops and vegetables. Yes, the irony of going green is that there is less green to go around!
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China’s government has finally attempted to cool the heels of its share market by unexpectedly tripling the stamp duty payable on share trading to 0.3%. This reverses a cut made in 2001 and is an attempt to curb the rise in stocks that have reached such levels to warrant the repeated use of the word “bubble”. So far in 2007, the Shanghai Composite index has risen 62% while the Shenzhen Composite is up 135%.
Although more efficient and profitable Chinese companies have provided some fundamental support to valuations, super-low interest rates and an influx of retail and household investors into the market have now pushed valuations way beyond their fair levels. The increased tax announcement made by the government last Wednesday came into effect immediately, knocking down the Chinese stocks by 6.5% on the day. Just as this proves a cautionary tale for China’s equity market, bulls of the Chinese market point to its long term growth potential, the listing of higher quality companies and the multi-year underperformance of the market as a reason to keep buying.
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And finally, the Belgian Army has been sent to tackle a plague of hairy caterpillars which cause dermatitis and respiratory problems for humans who come in contact with them. A mini platoon of soldiers is being deployed in the Limburg area armed with super size blow torches which they will use to blast the little critters from the trees. Earlier attempts to set traps for the adult moths by covering them with female hormones have apparently met with little success. If they fail, that means onward and upward with food prices then?
Have a good week,
Aparna Ram
Research Analyst
Seven Investment Management