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Wednesday, April 16, 2008 11:01 PM

Energy Affecting Food Prices

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Nearly every food staple has seen double-digit price increases over the past year, some of it due to skyrocketing energy costs. People are Squeezed by Rising Food Costs.

The cost of food has become a headline story the world over, from food-related riots in Haiti and Egypt to some Asian governments mulling whether to restrict rice exports. In the U.S., grocery bills are surging: Nearly every food staple has seen a double-digit percentage increase over the past year, including a 38% hike for a dozen eggs, to $2.16, and a 19% jump, to $1.78, for a loaf of white bread, according to American Farm Bureau data. With Americans spending 15% of their household income on food and drinks, rising prices in the grocery aisles have spurred consumers to hunt savings. Of that spending, only half goes to grocery stores, with restaurants collecting the rest.

Food is the most visible expenditure on the typical shopping list: After all, most people eat at least three times a day. As prices keep rising, it's hardly any wonder that Americans seem to be losing their appetite for discretionary purchases.

The price tally in the latest American Farm Bureau market basket survey of 16 basic groceries was $45.03 in the first quarter, up 9% from the same period last year. Many of the price increases are eye-popping—a five-pound bag of flour cost $2.69, 26% more than last year.

The surge in food costs has been attributed to several factors, including the increasing number of American farmers who now grow corn to supply the ethanol industry instead of food companies. In turn, they have reduced the amount of land farmed for wheat and soybeans, leading to a huge strain on food processors such as ConAgra Foods (CAG), Kraft Foods (KFT), General Mills (GIS), and Kellogg (K).
Strain Or A Gain?

Was that a strain or a gain? Inquiring minds demand a closer a look.

Conagra Daily Chart

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Kraft Daily Chart

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General Mills Daily Chart

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Breakfast of Champions

The charts suggest that General Mills is able to pass on increases far better than Conagra or Kraft. Please consider this press release: General Mills Reports Strong Growth in Fiscal 2008 Third Quarter.

General Mills today reported results for the third quarter of fiscal 2008. Net sales for the 13 weeks ended Feb. 24, 2008, rose 12 percent to $3.41 billion, fueled by 6 percent pound volume growth. Gross margin expanded to 39.8 percent of sales, as mark-to-market valuation of commodity positions, productivity and pricing offset significantly higher input costs.

Chief Executive Officer Ken Powell said, "This was a terrific quarter for General Mills, fueled by continued strong demand for our products in markets all around the world." Each of the company's business segments reported net sales and operating profit growth for the quarter. These gains came on top of good growth in last year's third quarter, when General Mills' net sales grew 6 percent and earnings per share rose 9 percent.

Where is the Strain?

The strain is not on General Mills. The strain is on consumer pocketbooks.

Energy and food are two places where rising producer costs are passed on to the consumer. Some people mistake this for inflation. It's not inflation.

Unless there is an increase in money supply and credit, what goes up somewhere must go down somewhere else. This is simple arithmetic and it's amazing how few get it. Credit (marked to market is contracting rapidly). Money supply, measured accurately, is barely moving. Therefore, what goes up somewhere is falling somewhere else.

What's going down is home prices, car prices, and prices of damn near anything produced by China and sold at WalMart.

For a discussion of this idea, please see Why Do Oil Prices Keep Rising?

However, people do not buy homes, computers, and TVs every week. People do buy gasoline and food every week. So people are screaming about what they see because they buy it every week. What people want is for home prices to rise and the price of food to sink. The market only accommodates such fantasies for a short time. If anything, the market accommodated that fantasy far too long.

Fantasy time is over and reality is now setting in. Here is the reality: Prices of things we absolutely need are rising (food and energy). Prices of things consumers are stuck with (houses and stocks, the latter via 401Ks and company options) are falling. This can go on longer than anyone thinks.

Mike "Mish" Shedlock
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