As if Americans haven’t noticed, their trip to the grocery store over the past couple of years has cost them more. How much more? Between 12-20% depending on what you purchase.
Why?
There are a few reasons, and a few insights.
1. Worldwide, many economies that for years were stuck in the doldrums are starting to emerge. Brazil, China and India have massive populations that are transitioning from being dirt poor and eating what they could scavenge to populations that are becoming more middle class. As a nation gets wealthier, its diet changes and demand for better grades of protein and higher quality foodstuffs increases. For many of these foods, it’s hard to increase supply so prices go up.
2. Loose monetary policy in the US. The weak dollar policy that began under President Bush and accelerated under President Obama has caused the cost of production to increase. This has spilled over into the end cost for food. It is impossible to be critical of each and every policy that the Treasury and Federal Reserve have employed to counteract the financial crisis, but QE2 is one that has been really harmful to the American consumer because it devalued the dollar relative to other currencies in a significant way.
AMEX Dollar Index Stock Chart by YCharts
3. Ethanol subsidies have contributed mightily to an increase in the price of grain. This has cycled through, and artificially driven up prices in a lot of different sectors of the economy, food, drug and chemical being the most affected. Ethanol subsidies also tie the price of corn to the price of oil, even though the two markets are unrelated when it comes to supply and demand. When oil prices increase, corn rallies.
If we examine meat prices, something else is really interesting to me. The WSJ story I linked to reports that pork prices are up 17%, beef prices are up 14-15%, and bacon prices are up 34%.
Bacon prices are always more volatile than other meat group prices. There is seasonality to bacon, and they have always moved more. But they have moved double, and that isn’t normal.
The reason that I can point to is there is no futures contract for bacon. The Pork Belly contract at the $CME was delisted this year. The contract had no appreciable trading volume or open interest for years. Having no speculative futures contract makes it much more difficult for producers and consumers to diversify and hedge their risk. Having no outlet for risk transfer, they have no choice but to raise prices.
It’s hard to say how much the price for bacon would be up if there were speculation in pork bellies. But I would hypothesize that all things being equal the price would be up much less than 34%.
The next time you hear someone rail against greedy speculators, tell them you’d rather pay lower prices for goods and services than listen to them whine about something they didn’t know anything about.
Which market has a functional futures market where there is speculation and which doesn’t?
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