Blimling and Associates Blog

Commodity mania was just about at its peak in 2008 when the OECD published a breathlessly anticipated report on global food supply and prices. There was a concurrent conference in Rome that attracted a fair amount of media attention. The challenges of feeding a growing world were front and center.

Naturally enough, the issue got pushed to the background amid the subsequent global economic collapse. Slowly but surely, however, the issue of food security, scarcity and pricing is creeping its way back to the foreground. Saturday's editions of The Wall Street Journal featured an article entitled "Commodity-Cost Jump Threatens Rebound":

From corn to crude, prices for a wide range of commodities are on the rise across the globe, a trend that underscores -- but could also hinder -- a gathering economic recovery. In recent months, global food prices have been growing at a rate that rivals some of the wildest months of 2008, when food riots erupted across the developing world. Higher prices could be a positive sign that companies are gearing up for a rebound in consumer spending, or the harbinger of a return to the upward spiral that plagued consumers before the recession took hold. The surge in commodities "is a reflection of extremely strong demand in the emerging world, and growing hopes of stronger demand in the developed world," said Jim O'Neill, head of global economic research at Goldman Sachs in London. It is "encouraging so long as it isn't too persistent." But Hugh Grant, chairman and chief executive of St. Louis crop-biotechnology company Monsanto Co., said the recession merely "masked" the 2008 food crisis. The price of a bushel of corn -- a ubiquitous ingredient in the U.S. diet -- rose 24% since Sept. 1. In Thailand, the price of a metric ton of rice, a staple across the region, stood at $618 in December, up 11% from September, but well below a peak of about $1,000 in April 2008. An index of global food prices compiled by the United Nations jumped 6.9% in November alone from the month before.

It is worth noting that, while dairy prices managed to flirt with multi-decade lows, other markets fell to levels that would have been considered on the high side five or ten years ago. Look at corn. Yes, corn prices came unglued. But in the face of (a) worldwide economic collapse and (b) the largest crop ever growing in the field, nearby futures never got lower than $2.90-$3.00/bu. Those used to be high prices. The CRB Foodstuffs Index offers an interesting view of what looks to be a structural shift that could last for a long, long time.

Consumer retrenchment has been a consistent theme underpinning our analysis of dairy and other commodity markets over the past year. It is likely to remain a theme going forward, as hard and soft data continue to point to a new frugality among US consumers who had, until late 2008, been prodigious spenders.

Friday's editions of The New York Times featured a story about the pursuit of dining deals in Florida under the headline "Newly Frugal Generation Revives Discount Dining":

Many restaurant owners, on Florida’s east and west coasts, now report seeing behavioral changes that remind them of the generation that survived the Depression. In addition to coming in early for specials, they said, more customers have been using coupons, sitting down only after studying the menu and wasting less food.

“The value of money has changed in America,” said James Accursio, whose family has owned the Capri, an Italian restaurant in Florida City, since it opened in 1958. “We’re not high rollers anymore.” 

His restaurant is one of many experiencing a moment reminiscent of the movie “Cocoon.” As Mr. Accursio scanned his main dining room on a recent Saturday just before the early bird expired at 6:30, he saw more young faces where only old ones used to be...

Careful spending is not just a restaurant phenomenon. The latest edition of The Atlantic magazine has a two-page spread with various data seeking to summarize the state of the union in 2010. Two tidbits jump out: coupon redemptions in the third quarter of 2009 were up 26% over the third quarter in 2008 and 42.8% of the groceries sold in 2009 were sold on promotion.

Should it be any surprise, then, to see consumer credit contract further in December? Not really. The numbers published by the Federal Reserve on Friday showed a $17.5 billion reduction in consumer credit outstanding in December versus November. Consumer credit outstanding after growing consistently for decades is now down 10 months running, and the year-over-year declines are at a level not seen since 1944. Revolving credit took the biggest hit, with dollars outstanding down 18.5% on an annualized basis.

Interest rates in China are up, which observers see as perhaps the first move toward addressing mounting inflation pressures and asset bubbles. Rates had been steady for several months. From The New York Times: 

Raising interest rates may help discourage speculative investments by Chinese companies and individuals in real estate projects and other areas of economic activity. China’s dilemma is that higher rates may also prompt overseas investors seeking higher returns to redouble their efforts to push money into China, despite the country’s stringent capital controls.The People’s Bank of China announced Thursday that the yield from its weekly sale of three-month central bank bills had inched up to 1.3684 percent. The yield had been stuck at 1.328 percent since Aug. 13. An increase of less than 0.05 of a percentage point might sound small, but economists said it was a harbinger of more interest rate increases to come.They cited expectations that consumer and producer prices would rise in the months ahead, particularly compared with low price levels a year ago, when demand temporarily slumped in China as well as the rest of the world. “It is a turning point,” said Ben Simpfendorfer, an economist in the Hong Kong offices of Royal Bank of Scotland. “There is a convergence of events that will lead to higher rates.” The increase in the interest rate turned mainland China’s stock markets into Asia’s worst performers Thursday. The CSI 300 index of shares on the Shanghai and Shenzhen stock markets slumped 1.98 percent.

Given that few commodity stories with any depth can avoid mention of China it is reasonable to wonder whether efforts to fight inflation there will have a negative impact on a variety of markets. China's appetite for soybeans, for example, has been voracious. Closer to the dairy industry, whole milk powder imports have been exceptionally strong. In light of today's news should it surprise that WMP prices were down 7% in the latest Global Dairy Trade auction?

The Goldman Sachs Commodity Index was off to a strong start in the first week of the new year, largely as a function of strength in energy markets. It will be interesting to see if prices come under pressure in the wake of the China news.

The Institute for Supply Management purchasing managers index for December came in well above expectations,with a reading of 55.9 -- the best showing since April 2006. Manufacturing, employment and new orders all rose. According to Norbert Ore, who conducts the survey for the ISM, 

"The past relationship between PMI [purchasing managers index] and the overall economy indicates that the average PMI for January through December (46.3 percent) corresponds to a 1.6 percent increase in real gross domestic product (GDP). However, if the PMI for December (55.9 percent) is annualized, it corresponds to a 4.6 percent increase in real GDP annually."

Some who believe that the US equity markets are over-valued say that prevailing PE multiples imply levels of economic/GDP growth that are not remotely likely -- levels such as 4 or 5%. Yet here is an ISM report that, for one month anyway, comports with that type of growth.

Beyond the US, PMI readings in other nations were strong as well, at least hinting at firming on the global economic scene.

The Wall Street Journal: World's Factories Rebound

Keeping our eyes trained to the Far East...

China is struggling anew with its dairy industry, with wire reports noting a new "milk scare" unfolding. The Shanghai Panda Dairy Co. has been shuttered after excessive amounts of melamine were discovered in its condensed and powdered milk. According to today's editions of The Wall Street Journal, 

The latest recall, extending to seven Chinese provinces, was reported by state-run Xinhua news agency late on New Year's Eve and published in newspapers the following day. Shanghai Panda Dairy was shuttered and three of its top officials were detained by police, according to the reports. An affiliate company that may have supplied ingredients based in the province of Ningxia is being investigated, the reports said.

A melamine scandal -- and deaths of numerous infants -- in the Autumn of 2008 rocked the Chinese industry. Just recently, a report in the People's Daily indicated that demand had managed to get back to 90% of pre-2008-scandal levels. It is not clear what the fallout from this latest episode will be...but it is not likely to help demand. At the same time, China's internal struggles can create demand for outside product. Indeed, China imported huge volumes of whole milk powder in 2009, perhaps in pursuit of "clean" product.

Beyond dairy, economic performance in China continues to surprise to the upside. This morning the wires note that manufacturing activity in December was strong. According to CNBC.com:

The HSBC purchasing manager index (PMI) rose to 56.1 in December, up from 55.7 a month earlier and the highes t since the survey began in April 2004. A reading above the watershed mark of 50 indicates an expansion of manufacturing activity.It capped a remarkable turnaround for Chinese factories, with the PMI averaging its highest quarterly reading in survey history in the final three months of 2009 after plumbing a record low a year earlier.

A growing China would seem to be a good thing for food and dairy product demand...but the dairy industry's credibility may be strained.

A faltering dairy sector has certainly created economic challenges in the Central Valley of California this year. The problems go beyond dairy, of course: real estate values have plummeted. A CNBC.com post today discusses ongoing issues with mortgage debt, even among households that have managed to get loan terms modified. 

Nearly 40 percent of homeowners who received a loan modification that reduced monthly loan payments by 20 percent or more were at least two months late again within a year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said Monday.

The story is accompanied by a list of the 10 US Cities with the greatest percentage of "underwater" mortgages. The Central Valley is well represented, with Modesto and Merced ranking #3 and #6, respectively. Stockton is #2. 

Unemployment is rampant in the Valley, as well, with rates in Visalia, Merced and Modesto all in the 16% area -- and near the top of the Bureau of Labor Statistics' ranking of unemployment in 372 metropolitan areas.

Tough times all the way around.

Recent stories in The Wall Street Journal and The New York Times spotlight polls that seek to assess consumer sentiment amid high unemployment. To put it mildly, neither story is an uplifting read. From the Journal article entitled "US Hurting in Wallet -- and Spirit": 

More than four in 10 Americans said they considered it extremely likely that they would lose a job, have wages and bonuses cut, or be forced into a lower-paying job in the next year. (A third said one of those things already has happened.) A quarter of Americans fear a double-whammy, expecting to simultaneously lose income while also having to assume the burden of housing or financially aiding other family members.

From the Times dispatch entitled "Poll Reveals Trauma of Joblessness in the U.S.": 

More than half of the nation’s unemployed workers have borrowed money from friends or relatives since losing their jobs. An equal number have cut back on doctor visits or medical treatments because they are out of work. Almost half have suffered from depression or anxiety. About 4 in 10 parents have noticed behavioral changes in their children that they attribute to their difficulties in finding work. Joblessness has wreaked financial and emotional havoc on the lives of many of those out of work, according to a New York Times/CBS News poll of unemployed adults, causing major life changes, mental health issues and trouble maintaining even basic necessities.

It is tempting to look at the proliferation of stories along these lines as an indicator that the worst is way behind us and that things might get a lot better, a lot quicker than expected. Sometimes, in other words, all of the media attention is a contrary indicator. At the same time, no one really has a contemporary frame of reference for the depth of the current despair. Anxiety could linger for months, perhaps years -- which, of course, can dramatically influence consumer behavior.

The latest employment situation report offered two pleasant surprises this morning. First, the number of jobs lost dropped to 11,000, the best showing in some time. And, the unemployment rate dropped from 10.2% in October to 10.0% in November.From The Wall Street Journal:

The payroll data reflects a notable improvement in the jobs market. In the prior three months, payroll job losses had averaged 135,000 a month. Employment in the service sector -- the main source of U.S. jobs -- rose by 58,000 in November. But that was more than offset by manufacturing companies shedding 41,000 jobs and construction companies cutting 27,000. Health care employment continued to rise in November, by 21,000. The industry has added 613,000 jobs since the recession began at the end of 2007. Friday's report showed that average hourly earnings rose by 0.1%, or $0.01, to $18.74.The average workweek rose by 0.2 hour to 33.2 hours in November.

It is hard, of course, to look at 10.0% unemployment as a victory; nor is it hardly a cinch that the trend has been reversed. But a positive development is a positive development.

Nearly every day a look at the news wires produces stories about newfound consumer conservatism. Today is no exception, with a story in USA Today under the headline "More Holiday Shoppers May Go Cash Only, No Credit Cards." That portends less spending:

A shift away from credit cards could make what is expected to be a difficult holiday season even more challenging for retailers. Store clerks have long found that it's easier to persuade people who are using credit cards instead of cash to spend more than they were intending, says NRF spokeswoman Ellen Davis. Not only that, but when consumers use credit cards to shop, "they're more likely to buy in the first place," says James Roberts, professor of marketing at Baylor University in Waco, Texas. Consumers are more frugal when they use cash, because they're acutely aware of how much money they're pulling out of their wallets, says Sue Fogel, chairwoman of marketing at DePaul University in Chicago. With credit cards, she says, "it doesn't seem quite as real." Some research has suggested that simply putting a credit card logo in a consumer's peripheral vision will cause the individual to spend more, Fogel says.

Are consumers going to spend less this holiday season? The jury is still out. A recently published survey by the Deloitte consulting firm indicated that consumers are planning on buying fewer gifts -- an average of 18.2 compared to 21.5 in 2008 and 23.1 in 2009. But respondents indicated that they plan to spend more this year on socializing, entertaining and holiday home furnishings. According to the survey, average total spending will be at about $1,145, which would be up 16% from a year ago.

Federal Reserve Chairman Ben Bernanke delivered a speech this morning at the Economic Club of New York. His remarks included some commentary on the value of the US Dollar. He said that, "we are attentive to the implications of changes in the value of the Dollar...[we will continue] to monitor those developments closely."

An Associated Press dispatch noted that:

Bernanke engaged in a delicate dance. He made clear that Fed policymakers will keep rates at super-low levels. Yet through his words, Mr. Bernanke is also trying to bolster confidence in the dollar without actually raising rates, a move that could short-circuit the fragile recovery. Economists say a free-fall in the value of the dollar is remote but cannot be entirely dismissed. Although low interest rates can put additional downward pressure on the dollar, they are needed to encourage American consumers and businesses to spend more and fuel the economic turnaround.

"Delicate dance" seems to accurately capture the Fed's dilemma, which we have noted is a battle between deflationary forces in the real economy and inflationary forces. Bernanke and other central bankers globally have taken the age-old tack to flight deflation -- pumping massive amounts of liquidity into the financial system. That liquidity, however, can create asset inflation -- dangerous levels. 

Bernanke said today that he expects inflation to be "subdued for some time..." But is that a comment about the real economy (such as capacity utilization) or about commodities (such as the price of oil)?

The Dollar today? It's down some.