Have we reached the end of the food inflation story?

Published on: 04:59AM Sep 19, 2008
The chart of the week is the annual change in total beef, pork and chicken production.  As one can tell from the chart below, protein output is expected to notably decline next year.  Why is this anticipated to occur? For the most part its due to higher feed costs. Roughly 28 months ago we began introducing our clients to an emerging biofuel- ethanol. And although corn based ethanol is not the sole driver for the higher feed costs, it may have been the spark that ignited the bull. Yes its true corn (a major feed ingredient for cattle, dairy cows, hogs and pigs) prices have come off notably since their highs this June, but for the most part we are still talking about roughly $5.00 a bushel corn for protein and dairy producers in the coming year. The 30 year average for farm corn prices before the fall of 2006 was roughly $2.35 a bushel. Its well documented that protein producer margins have waned due in a large part to the surge in feed and energy costs. And they have responded by cutting back their animals in an effort to pressure the prices of their end products to profitable levels. For the most part, we haven’t got there yet and may not do so fully until at least 2010. Thus a downturn in overall protein production could persist for the next few years which will likely be inflationary for overall protein prices.
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