First Petrol, Then Energy – Now Food Prices Skyrocket; China Facing Inflation Nightmare

Oil Prices Rise to Highest Level in Two Years

December 22, 2010

Epoch Times — Crude oil futures settled at above $90 a barrel on Wednesday, the highest level in more than two years.

By market close, crude oil futures for Feb. 2011 deliveries settled at about $90.40 per barrel, according to data from the New York Mercantile Exchange, the highest level since October 2008.

The U.S. Energy Information Administration said on Wednesday that crude oil inventories in the United States fell by 5.3 million barrels last week, which partially contributed to the rise in oil prices and seen as bullish development for commodities traders.

In addition, winter months typically see higher demand for oil due to heating and transportation needs, which also affects the recent upward swing of oil prices. Until this week, colder than average temperatures were experienced in North America as well as Europe.

According to a Reuters poll this week, the Organization of Petroleum Exporting Countries (OPEC) will be pressured to produce more oil earlier than forecasted due to record-setting demand this winter and higher-than-expected demand in early 2011.

Oil fell from highs in 2008 after the global economic recession sapped worldwide demand for oil, but as nations recovery from the crisis, ramping industrial demand—especially from East Asia—will likely push oil prices past the $100 mark in 2011.

First Petrol, Then Energy – Now Food Prices Skyrocket

December 22, 2010

The Independent - Food prices are set to spiral in the new year on the back of soaring commodity costs, exacerbating the squeeze on household budgets that have already been hit by higher petrol and energy bills.

Inflation statistics released by the Office for National Statistics show food prices rose by 1.6 per cent last month, an annualised rate of 19.2 per cent, the fastest rise since the 1970s.

Growing populations, rising affluence in Brazil, Russia, India and China, and crop failures caused by extreme weather have pushed up the prices of wheat, sugar, cotton and many other household staples.

So far, bread, breakfast cereals and clothing have become more expensive -- but the full effects of the cost of raw materials have not yet filtered through to shops, meaning they are likely to rise sharply in the coming months. Wheat, for instance, is up by 69 per cent this year, while many other commodities have risen sharply on an annual basis. Coffee is up by 48 per cent, potatoes by 47 per cent, cocoa powder by 32 per cent and sugar by 23 per cent, according to the commodities and raw-materials company Mintec.

Aside from cotton -- which has doubled in price after decades in the doldrums -- the biggest single rise has been in orange juice, which has jumped by 70 per cent, sending the supermarket price of a litre of Princes up by 54 per cent from 92p to £1.42.

Some commodities have fallen, such as milk powder, down 9 per cent, and cocoa beans, down 16 per cent, as fears about political instability in Ivory Coast have faded -- but they have not been enough to offset rises elsewhere.

Although speculators have been blamed for fuelling the rises, commentators say the main cause is an imbalance in faltering supply and rising demand.

Freak weather has worsened the situation. Below-freezing temperatures have severely damaged the sugar cane crop in Florida, coming on top of smaller-than-expected harvests in Brazil, Europe and Russia. Coffee prices closed at their highest price in 12 years last week, as a result of poor weather in Vietnam and torrential rains in Colombia, the world's biggest producer of arabica beans.

Cotton has doubled in price this year, following crop failures in two key producers, China and Pakistan, caused in Pakistan's case by severe flooding.

The UN Food and Agriculture Organisation says there is no doubt that the longer-term trend for food prices is for them to rise.

"Almost all commodities are in a tight supply-demand situation, and so we would need to see high production in all commodities, which is unlikely," said Abdolreza Abbassian, secretary of the Intergovernmental Group on Foodgrains.

Among the companies that have warned they will be unable to avoid passing on rises are Premier Foods, which owns Hovis, the Anglo-Dutch household products group Unilever, and coffee-to-cheese giant Kraft. Clothing retailers Primark and Zara have indicated the era of low-cost fast fashion may be over.

Under-pressure households are likely to find other bills rising in 2011 too: wholesale gas prices have hit their highest level for two years. Petrol prices reached a record of 122p a litre earlier this month, taking an extra £2.9bn a year from consumers compared with last December, according to the AA.

The rises are likely to put further pressure on the Retail Price Index, currently well above target at 4.7 per cent, which might cause the Bank of England to raise its base rate from the historic low of 0.5 per cent -- adding hundreds of pounds a month to mortgages.

Consumers are likely to find 2011 is a tough year. VAT is set to rise to 20 per cent in January, although this will not affect most food and children's clothing, which are zero-rated.

Tens of thousands of public-sector jobs are also expected to be lost as the Government cuts public expenditure in the hope the private sector will step in to drive growth and employment.

The big squeeze

Wheat

So many products are made from wheat -- bread, pasta, breakfast cereals -- that a price rise can have a dramatic effect. Mysupermarket.co.uk says the price of an 800g loaf from the UK's biggest baker, Warburtons, has risen 8 per cent from £1.24 last year to £1.34 this year. A pack of Kellogg's Crunchy Nut Cornflakes is up 3 per cent from £2.88 to £2.96.

Coffee

Processors such as US company Kraft have put up the price of brands such as Maxwell House following a jump in the price of unprocessed "green coffee," which has risen 48 per cent this year as a result of bad weather.

Sugar

A shortfall in production in Latin, Central and North America, and Europe has been only partially offset by a better-than-expected harvest in India. Year on year, sugar is up 23 per cent and molasses up 13 per cent.

Potatoes

Potato prices have jumped sharply as a result of the snow, which has disrupted supplies in Britain. The Potato Council's GB free-market average has hit £170 a tonne, almost £81 higher than the same week last year.

Cotton

Poor crops in China and Pakistan have helped double the price of cotton in the past year. Fashion retailers will have to mark up garments.

Chocolate

Prices of cocoa beans have fallen from a summer high but powder used in hot chocolate is up 32 per cent this year.

China is Waking Up to an Inflation Nightmare

December 21, 2010

IntelDaily - Among civil unrest fears, fragile exporters and a speculative property boom, China has a very bumpy ride ahead…

The inflation situation in China is getting out of control. Consider this from Bloomberg:

Chinese consumers are more concerned about rising prices than at any time in the past decade, underscoring the pressure on policy makers to step up efforts to counter inflation running at a two-year high..

…Authorities have held off on adding to October’s interest-rate increase, instead ratcheting up banks’ reserve requirements and using tools such as sales of food reserves to tackle inflation. The Commerce Ministry said [last week] it will “closely monitor” prices over the next quarter, especially during holiday periods, and keep releasing stores of pork and sugar…

The Chinese economy has gotten itself into a real jam. As we have detailed in the past in these pages, there are no easy solutions for China now.

When inflation gets so bad that food and energy costs spiral out of control, civil unrest becomes a risk. The authorities in China have always put civil unrest fears at the top of the list, given the rigid nature of the authoritarian political system.

Western democracies are more flexible — when people get upset, they can “throw the bums out” even as the political institutions endure.

In China, though, the party leaders are the institution. What’s more, in the face of rapid economic growth, the longevity of an authoritarian political structure such as China’s is an open question. (As China grows more prosperous, Chinese citizens will hunger for more rights and freedoms.)

So China is now in a place where inflation must be tackled, if only to head off the risk of civil unrest. But raising interest rates — normally the obvious and clear step — is problematic as an inflation-fighting method because of China’s mercantilist export system.

As we have mentioned before, many of China’s exporters operate on razor-thin profit margins. This is a function of Beijing supporting the export industry as aggressively as it can, in order to create jobs and underwrite economic output.

Where to find “real wealth”…

If you guessed the U.S., you’re in for a shock.

The U.S. economy may be recovering, but it’s nothing compared to the area some analysts are calling the “Global Wealth Zone.” Investors who move their money into the Global Wealth Zone now could more than double their net worth… but only if you know exactly where to look.

The trouble here, though, is that razor-thin profit margins mean things like a hike in interest rates or a rise in the value of China’s currency can be fatal. Some exporters have said even a 1% rise in the value of the yuan could wipe them out.

Of course, China doesn’t want to admit that serious internal issues are staying its hand. So China’s leaders blame outside forces instead as a reason for their lack of action. Via Bloomberg again:

China’s central bank Governor Zhou Xiaochuan indicated that turbulence in the global economy is limiting the nation’s ability to raise interest rates to counter inflation, according to the China Daily newspaper.

The government is taking a very prudent approach to increasing rates because of an unstable and rapidly changing global situation, the state-run paper reported today, citing Zhou. It didn’t say where or when he made the comments.

China’s inflation climbed to a 28-month high in November and officials pledged this month to shift to a tighter, “prudent” monetary policy stance in 2011…

Adds Chang Jian, a Barclays economist in Hong Kong:

“The procrastination in raising interest rates will further increase the risk of asset bubbles and worsen the inflation situation.”

Yup. And that’s pretty much the modus operandi of governments everywhere. Decisions that look attractive in the short run are taken at the expense of nasty costs in the long run.

One reason governments are able to do this over and over — make dumb decisions, then find themselves in awful jams — is because people are so bad at tracing the consequences of actions over time.

The inflation “nightmare” that is unfolding in China now, for example, is largely the result of the “sweet dream” super-stimulus China pumped into its economy circa late 2008/early 2009.

In a way, then, stimulative government policy is like a powerful drug — heroin or crack or cocaine. When you take it, you feel great. Sometimes the “rush” can last for an extended period of time. But then the “comedown” is hell.