Food For Thought

If you think food prices are high now, you ain't seen nothing yet. If the experts are correct–hopefully they aren't–Americans are about to be socked with much higher food prices. Worse than that, they should expect to be paying much more for many other products, too.

Farmers are the first to see the trends in the food industry, and their impressions are not encouraging. Here's what they are saying: The tractor and other tires they need are becoming more difficult to find, more costly when they do find them, and the same is true for much of the machinery they use.

But the problems don't end here; this is where they begin. Other items crucial to farmers are soaring too and these include fertilizer, fuel, and fungicides. Many farmers, already reeling from the drought and low profit margins, simply don't have the budget to make the vital repairs on infrastructure they need, purchase necessary products, and to also pay the salaries for essential workers.

"The higher prices are putting the squeeze on us," San Luis Valley farmer Reed Mattive said. "We can't shut off the lights and walk out of the building." The price hikes some agricultural businesses are experiencing are said to be the most disruptive in decades.

All Locked Up

At the same time, the problems of shortages and higher prices extend far beyond farms. Freight costs are rising significantly, many countries are experiencing dramatic labor shortages or can't get shipments of raw materials to keep manufacturing going, and inventories of many products are being depleted.

The growing number of people prepping also is putting pressure on supplies. There are increasing reports of shortages of beef, poultry, vegetables, grains, tissues, bottled water, and electronics. Clearly, given the serious problems with the supply chain and shortages, higher prices could become the new normal.

Anyone who goes shopping is aware of inflationary pressures out there. The most widely followed indicator of prices is the Consumer Price Index (CPI), and according to that the prices of beef, pork, and poultry are soaring; beef prices have risen 14% this year, pork prices increased by 12.1%, and poultry rose by 6.6%. The costs of other meats and fruits have increased by approximately 6% in the last year.

Just Passing By Or Staying For A While?

The Federal Reserve said the higher inflation was "transitory," that the disruptions were caused by the virus and lockdowns and that they would be resolved soon. So far that hasn't happened.

The Biden Administration acknowledged that the virus is only partly to blame for these increases. It points to a lack of competition in meat processing as a major factor.

"Just four large conglomerates control the majority of the market for beef, pork, and poultry, and the data show that these companies have been raising prices while generating record profits during the pandemic," National Economic Council Director Brian Deese recently said at a press conference.

Companies in the food industry have a different perspective. The Kroger Co., a $132 billion firm whose various businesses includes food, says inflation is running at a rate higher than management had anticipated; it now expects prices to rise an additional 2% to 3% over the second half of this year. Albertson's, a rival of Kroger, also anticipates that inflation will increase in the second half of the year.

Both companies are planning to pass along at least some of those increases to consumers, who are already trying to cope with the biggest increase in consumer prices since August 2008. Fox News reports that prices were up in five of the six major grocery store food groups in July,

It's relatively easy for consumers who spend a great deal of money on expensive and luxurious items to cut back on those. Coping is a much more difficult problem for people who live modest lifestyles and who have already tightened their belts.

While Perfect Storm?

no one knows for sure what economic conditions will be going forward, many economists believe more inflation is on the way. In addition to higher prices on items mentioned above, prices of bread, labor, electricity, coffee, jet fuel, some shoes and school supplies, some food, deliverers, and workers in fast food stores are also rising. In many of these cases, higher costs will be passed on to consumers.

Some shoppers are switching from major brands to private label products in an effort to offset those higher prices. But these measures generate only small savings and they are clearly fighting an uphill battle.

Although inflationary pressures are evident, some respected analysts on Wall Street such as Cathie Wood are warning that deflationary forces, not inflationary, are building up in the economy. "That's going to be the shocker," she says. "Deflation is going to be the greater risk."

Given the economy's still fragile recovery, rising prices, shortages, and other problems could materialize quickly. Investors would do well to watch the markets, their pantries–and their portfolios–very closely.

Sources: bloomberg.com; economicprism.com; foxnews.com; zerohedge.com