Food Prices on the Rise

Posted on Posted in Newsletters

After years of drought across the US, South America and Southeast Asia, we’re seeing one result in the form of higher food prices, especially beef and poultry. The Bureau of Labor Statistics reported last week that food prices gained +0.4% in February, the biggest monthly increase in almost two years. After rising +6.1% in 2012 and another +3.0% in 2012, forecasters estimate meat prices will increase another +3.0% to +4.0% this year, resulting in a 3-year price rise of +13.6%.

As you might expect, droughts hurt food production by decreasing the yield of crops, reducing supply. And as we know from Economics 101, when the quantity supplied of a good decreases and demand stays the same, the price increases. While droughts are obviously detrimental to farmers, their effects can reach directly to your dinner table and wallet.

How droughts lead to higher food prices

Texas and California are two cattle-raising states that have seen major droughts over the past few years. When a drought begins, grass (cattle food) growth slows and farmers are forced to purchase grain and other substitutes to feed their herds; at the same time, the drought increases the cost of that grain and other raw materials. Farmers also face additional costs, such as they need to irrigate their pastures in order to help the grass grow—and don’t forget that the drought also increases the price of water. As these factors combine to increase the cost of owning cattle, farmers begin to “cull” (reduce the population of) their herds. Initially, the influx of cattle into slaughterhouses decreases the price of beef, but down the road the drop in the global supply of cattle starts to drive prices up rather quickly (as we are seeing now).

A smaller population of live cattle also means that less milk is produced. This shortage, coupled with rapidly growing Asian demand for milk, has caused dairy prices to increase substantially. US dairy exports grew +19% by volume in 2013, as American companies shipped record amounts of milk powder, cheese and lactose, while the value of these exports grew +31% to $6.7 billion. The much faster growth in value than volume shows how sharply prices have increased.

While rising milk prices can make farmers very happy, purveyors may not be thrilled. In the US, where per-capita milk consumption has been on the decline for decades, purveyors of milk aren’t able to pass along these higher costs to consumers without risking declines in sales. This is causing problems for companies such as Dean Foods (NYSE: DF).

Brazil, the world’s largest producer of coffee, sugar and oranges, is also in the middle of a long, persistent drought that is affecting its crops. Coffee has been particularly hard hit: this year, in just 6 weeks, the price of Arabica coffee (the world’s most widely produced variety) has increased an astounding +75%! (It has since come down some but is still up +46% since the end of 2013.) Luckily for you Starbucks drinkers, they won’t be raising prices anytime soon, as they had previously locked in prices (using coffee futures) for all of 2014 and about 40% of 2015.

Think Globally

While the effects of higher food prices are being felt in the US, particularly by lower-income families, the impact is far more significant in emerging markets. Consumers in developing nations spend a far greater percentage of their income on food than we do—in Africa and South Asia, for example, a significant segment of the population spends anywhere from 50%-75% of their income on food.

The drought in Brazil is producing a domino effect beyond food. As a heavily hydropower-reliant nation, they face increases in electricity costs and have already had to deal with some blackouts. Also, the Brazilian real has depreciated against other major world currencies, which means imports like gasoline are more expensive to Brazil’s citizens. To make things worse, China’s demand for raw materials has been declining, and they are currently the world’s biggest importer of Brazilian commodities such as iron ore and petroleum.

Act Locally

For many Americans, the biggest impact on their food budget has been from higher beef prices. So what can you do about it? You can pray for rain, but the outcome of that is uncertain. A quicker and more effective alternative is to consider substitute protein sources, such as chicken breast, less pricey fish such as tilapia, eggs, skim milk, and especially nuts and beans (including soy and tofu). (For those that of you that care, the least expensive protein source is dried pinto beans from Amazon.com.) These proteins have several advantages over beef:

  1. They are less expensive and prices are rising more slowly.
  2. They are healthier for you (see Ken’s blog, “The Redder the Badder”).
  3. They are healthier for the environment.

This last point is interesting. Land-based proteins, especially beef, use a lot of resources. Beef production consumes 60% of the world’s agricultural land but produces only 5% of its protein. The massive land use for beef is both for cattle grazing and feed production. Beef is also a water hog: it takes about 2,500 gallons of water to produce a pound of beef. As a Newsweek article once stated, “the water that goes into a 1,000 pound steer would float a destroyer.” Globally, the 58.6 million tons of beef expected to be produced in 2014 will require 293 trillion gallons of water (this is 8 times the amount of water in Lake Tahoe!). It’s no wonder beef prices are so affected by drought.

In addition, the prodigious amounts of land needed for cattle grazing and feed production have led to substantial deforestation in places like the Brazilian Amazon. And on top of that, the methane expelled by cattle account accounts for between 14% and 22% of the greenhouse gases produced each year.

We’re not saying become a vegetarian (unless you want to or already are). But substituting other proteins for some of your beef will likely leave both you and our planet a little healthier and a little wealthier. The average American eats 60 pounds of beef per year; that’s about 4.5 servings per week. If we all reduced our consumption to an average of 2 servings per week, there would be less heart disease and cancer, we’d free up 1/3 of our agricultural land for other uses, and we’d save 75,000 gallons of water per person (4 Lake Tahoes globally).

As the ads say, “Eat Mor Chikin.” Better yet, “Eat Mor Beens.”

       Adam

Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)

Adam Bragman
Director of Business Development – Kenfield Capital Strategies (KCS)

Kenfield Capital Strategies℠ (KCS) is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with comprehensive financial, estate and tax planning services.

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