What does a gallon of gasoline, a plate of pasta, a loaf of bread or a gallon of milk have in common? They’ve all experienced a price decline over the past several months due to a drop in commodity prices – largely driven by aggressive speculation by traders. The market for oil, wheat, and milk has undergone a rapid transformation recently and the U.S. consumer stands to benefit from these changes into the future as fears of a European credit freeze and inability to structure a debt repayment plan that meets the requirements of the countries providing the bailout funds.
The Consumer Price Index (CPI) is tracked and prepared by the Bureau of Labor Statistics (BLS) and the most recent monthly report shows the seesaw nature of food and energy prices. Foods prices can vary widely depending upon where you live, but generally speaking the cost of food remains fairly consistent with a few exceptions. The biggest exception is weather and prolonged disruption of the growing season for wheat, soybean and corn. In the spring and summer too much rain is a big concern for getting the crop planted on time and in the late summer or early fall too much rain can be a real problem because its harvest time. So until we’re better able to control the weather – let alone actually predict the weather with any degree of accuracy – we’re at the mercy of Mother Nature.
Rain, Snow or Shine
Most consumers can appreciate how a random weather event can disrupt a harvest or delay a growing season – but few consumers realize the role that commodity speculation can play. A story in USA Today provides a good overview of other components that can impact pricing. The U.S. production of wheat and other grain products is historically one of the strongest and most reliable sources in the world. But even the U.S. is not immune to global influences – as recently as 2010 a bushel of wheat traded for less than $6 then rose steeply to $9 and has since fallen back again. Experts at the Farm Journal explain that any time a food product experiences a 50% increase in the cost of production, consumers can expect to see the retail price impacted at the grocery store.
As we’ve learned from and been conditioned by the oil companies – when a barrel of crude oil crosses the “magic” $100 a barrel mark we can expect to see prices at the pump exceed $4 a gallon. The strange thing is that when oil prices drop below $ 100, they have to really drop far below $100 and stay there for some time for the retail price of a gallon of gas to finally come down. The same price action is common with bread or milk or orange juice. Each of these food staples has an underlying commodity product that serves as a “price proxy” – whether we like it or even understand it. The U.S. Department of Agriculture (USDA) tracks data on food production and their data suggests that we can expect continued volatility in food prices.
Food for Thought
One of the drivers of wheat and corn prices in the U.S. markets is the ever-growing list of competing uses for wheat and corn – it’s not just food for our breakfast or dinner table anymore. The advent of biofuels has created a new and more lucrative, if not expensive use for wheat and corn. The U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) has taken the lead on biofuels – which includes ethanol and biodiesel fuels for motor vehicles. Ethanol is produced from wheat or corn through a process called gasification which in turn results in a final product capable of powering vehicles that can burn E85-rated fuel. All of this creates a secondary market for wheat and corn – one that competes directly with putting price-competitive food products on our table.
The next time you’re in the grocery store looking at bread, cereal or pasta products – remember – the food you’re about to purchase could just as well be re-processed and placed in your vehicle’s gas tank and serve as another type of fuel.