Considering Commodities: Will These Markets Get Even Hotter?
The food fuel hype has gone cosmic. Of course it is quite a shock for North Americans. After years of cheap gas, far cheaper than anywhere else in the world, the world of $4/$5 dollar a gallon gas is changing the way we live.
How this will play out with the oil demand equation is anybody guess. In the past when drivers have decided to stay home, demand drops and price eventually turns around. However, now with China and India driving too, its not so easy. With oil over $133/barrel, the days of $100/barrel oil seems like the good old days.
However, don’t cry for me or anybody else with a disposable income to handle it. Last week I listened to a special report on the BBC regarding commodity prices around the world. It was a fascinating report because I’m used to the typical North American shtick regarding big oil and big corn. This BBC report originated in the West African country of Ghana.
The BBC reporter interviewed people on the streets of Accra, the capital of Ghana. To put it mildly everybody was complaining about the price of wheat, rice and fuel. For instance the wheat price had gone up so much that people were buying bread by the slice. Diesel fuel was $5 gallon. With per capita income at $500/year, a gallon of gas for Ghanaians took up 1% of their income.
That’s a far cry from what gasoline, oil, diesel fuel, bread and corn meal is costing me and other Canadians. On a per capita basis we are far ahead of the Ghanaians. In fact everybody is, it’s just that we have this lavish energy consuming lifestyle. With high-energy prices putting a dent in that, its nothing like 1% of our income.
Still, the rise in commodities has “shocked the world’s system.” For instance the world grew complacent as long as commodities were cheap. Food is the quintessential example. For many years food has been taken for granted in Canada. Successive governments fostered policies to keep food cheap. Farmers fumed and constantly lost the battle to do anything about it. Now to some extent the tables have been turned and society so used to cheap food is howling.
Of course when I was in front of 10,000 angry farmers on April 5, 2006 on Parliament Hill screaming about Canada’s cheap food policy, greater society yawned. Now corn is double from starvation levels, triple for wheat and double for soybeans. I guess for farmers it’s be careful for what you wish for. Most Canadian farmers could even dream of such prices.
Realistically though, these prices don’t have a lot to do with the increase in the price of food. For instance how many consumers sit down and eat an ear of Canada #2 Yellow Corn? Nobody. How many Canadian consumers sit down and eat Canada #2 wheat or a handful of Canada #2 soybeans. Nobody. Simply put the increase in food prices have a lot more to do with “other issues” than it does the cost of the “raw material.”
For instance I recently read a piece from my DTN grain analyst colleague Elaine Kub. She illustrated in the US the processing and marketing bill for food represents 81 cents of the American consumers food dollar, leaving only 19 cents as the “farm value. The 81 cents broke down to 38.5 cents for labour, 12 cents for advertising and packaging, 7.5 cents for transportation and energy and 23 cents for other things within the processing game. So something tells me the guys getting rich on these food prices aren’t the primary producers on North American farms.
I don’t have Canadian numbers as yet, but if anything they would be similar. Go to the grocery store these days and you are inundated with packaging and processing and prices, which nobody needs. Yes, its grocery land Disney land in most big Canadians centres. The next time somebody complains about food prices, I say let them take a look around. Paying for all that grocery store overhead might be part of the explanation.
Meanwhile in the American Midwest there is corn everywhere. For instance the BBC correspondent got to go into the largest grain bin on earth. The elevator was shipping some of the corn to Texas that day. In fact, they were shipping last year’s corn, as they didn’t get down to that level in 2007. I thought last year’s corn? Is there really a shortage of “all this stuff?”
Of course that’s the million-dollar question. Everybody is screaming there isn’t enough oil. There isn’t enough grain. However, I think there is. Yes, it’s a long story, which everybody is adding to every day. The road ahead will be a long one. Yes, commodities are hot. As the weather warms up, we’ll see just how hot they’re going to get.