Big Supplies

What a difference a few months can make.

Earlier this year the whole focus was on commodity shortages – not enough wheat, smaller corn carryout. Now, all of the sudden, we are hearing that there are “big supplies” of wheat and corn.

That’s what Reuters is reporting today. “U.S. corn and wheat futures eased lower on Friday, extending heavy losses in the previous U.S. session, as grains remained under pressure from hefty global supplies and demand concerns in a deteriorating economy.”

Corn and soybean futures both dropped four percent in Thursday’s trade while wheat was down three percent. Reuters reports that corn was “feeling the squeeze in particular as traders took the view that the world was well supplied with feed grains and demand for ethanol production would be cut back.”

Corn has now dropped from a record high in June of $7.65 to the level it was trading at the start of 2007.

However, the big drop has had no effect on retail food prices, which continued to go up last month according to the October Consumer Price Index. According to a report by the Renewable Fuels Association this week:

Big Food often suggests a “lag effect” exists before changes in commodity prices are reflected at the retail level (they say that’s why food prices haven’t come down, despite the plunge commodity prices). However, it is clear there was no “lag effect” in early 2007. When the producer price index (PPI) for farm products increased rapidly, food companies reacted quickly, as demonstrated by the accelerated trend in the consumer price index (CPI) for food. And as producer prices for farm products have dropped dramatically since June, food inflation continues to increase at a faster‐than‐normal rate.

Meanwhile, the big food companies are reporting “higher‐than‐expected earnings for the quarter that ended in September 2008, due in large part to higher prices for consumers.” Something stinks here.