Is the Food Price Inflation Scare Mostly Hype?
Just about every news source is talking about food shortages and price inflation across the globe.
India has been experiencing astronomical inflation as a result of massive flooding that has destroyed many crops and blocked access to others. High temperatures and excessive rain have made for poor grain crops in the U.S. and the subsequent inflation of wheat and corn prices. Russia has banned the export of grains to offset weather-related shortages, leaving countries like Egypt, the world’s largest wheat importer, looking for a new market. And even Walmart (WMT), who was just slashing prices earlier this year, has now raised food prices to a two-year high.
But what does all this mean for the American consumer? With so many different sources of information only giving you part of the story, it can be rather daunting, especially when no one really explains what the numbers should mean to you.
So here’s what you need to know:
- India is in a heap of trouble. The flooding is a serious problem and as of September 25, India’s food price index had risen to 16.24 percent. Worse still, the flooding brought on by monsoons has left two million people in northern India homeless. However, on a global level, India’s misfortunes are unlikely to have much of an effect on other economies. And things have been looking up for India as floodwaters have begun to recede, making more crops accessible, resulting in small decreases in prices. Still, India has a hard road ahead, and should expect to see higher than average food price inflation for the near future.
- Government assessments of U.S. grain supplies for the coming harvest changed in early October, so while the commodity prices on grains such as corn were actually dropping at the beginning of the month, they’ve now increased in anticipation of a shortage. However, it doesn’t look like we should expect price increases on bread and cereal in the grocery store just yet. While commodity prices are up, retail prices are in stasis. It’s next year that we have to worry about. If commodity prices continue to stay high, those prices will eventually be passed on to the consumer, though don’t expect food inflation to be as extreme as it was a couple of years ago. Price increases in 2008 were in large part the result of increases in the cost of fuel, which resulted in the increased cost of transportation for foods across the board rather than affecting just a few specific crops, as is the case now.
- Egypt is in trouble because of Russia. With Russia’s wheat shortages brought on by high temperatures coupled with drought, the government has banned any export in order to ensure adequate supply for its own citizens, and their neighbors in Ukraine have similarly been affected and have responded by imposing quotas on the export of major grains, including wheat, barley, and corn. With the significant decrease in Ukrainian exports, Israel needed to look for other sources of these important staples, and increased imports from the U.S. of sorghum and corn, more than doubling the U.S. market share for the two products in Israel. Of course, this was before the U.S. was expecting shortages and we may not be able to continue to export as much as we have in the past, but Israel hasn’t suffered as a result of Ukrainian shortages because they were quick to find a new source to meet their needs, and now Egypt needs to do the same. The global market is not deficient and can meet Egypt’s needs. And to look on the bright side, Egypt’s economy has been consistently growing, even through the 2008 financial crisis, and is expected to grow by 6 percent by the end of their next fiscal year, according to Prime Minister Ahmed Nazif.
- Now to Walmart, who has been in the news this week for increasing prices to the highest they’ve been in twenty-one months, and this after they significantly cut prices earlier this year. Walmart stock has been underperforming for the last five quarters, and in an effort to lure shoppers into the store, they slashed prices to ultimately unsustainable lows. Their plan backfired as the next quarter, ending July 31, showed same-store sales dropped 1.8 percent and stock dropped from 55.49 points at the beginning of the quarter to a 48-point low on July 2. Stocks only began to recover when Walmart began to increase prices, but they still finished the quarter with more than a four-point loss. So far Walmart has been doing better this quarter than last, and is breaking even for the year, but it’s still off its high from before the 2008 market crash by about 15 percent, and given the (slightly) improved economic climate, they will likely continue to gradually increase prices in hopes of increasing revenue without losing customers.
All in all, most of what you’ve probably been reading about food shortages and inflation is a lot of hype. While it’s true that India is facing very real and extreme food shortages that will significantly impact many people who cannot afford to pay higher prices, Americans don’t have much to worry about in terms of food shortages and price inflation—at least not yet. So in the spirit of waiting to cross the bridge until you come to it, just relax and take comfort in the fact that things could be, and have been, a lot worse.
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