A commodity price surge is hard to pass onto consumers. Cotton is up almost 60 percent in two years, there has been an over 40 percent in wheat. Coffee has hit 13 year highs. World food prices have increased to pre-recession levels. The UN FAO Food and Agricultural Organization food index is up over 20 percent this year. Food imports to poorer countries will reach a trillion dollars.
Still it will be hard for demand to change significantly given these large price changes especially for developed countries. The price of beans have little impact on the cost of your Starbuck's grande. The main cost is the preparation and delivery of the coffee. Consequently, there will be little decrease in demand from the supply shocks in these markets. There will of course be a stronger impact on developed countries where food represents a greater portion of total consumption. Hence, we are seeing greater price increases in developing countries. These are the places that will see higher inflation and the locations which will have a stronger reaction to price shocks.
What will happen with many food products will be slight changes in packaging or a change in the percent of ingredients. For example, cereal boxes may get slightly smaller. Clothing may have a greater portion of blends over pure cotton.
Inflation will occur through a change in quality. For example, improvements in the computer technology at the same price will lead to a decline in government price indices. An increasing in quality for the same price is deflationary. Inflation my come in the form of declining food or commodity input quality.
What will also occur is a tightening of profits for those companies that serve as intermediaries in the food business. If price increases cannot be passed to consumers, profit margins will decrease. We should look to see earnings surprises on the downside for many consumer companies.
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