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Inflation UK style

The UK just announced a disturbing level of inflation for them (4%) and it is happening in a relatively tight monetary policy environment. Unlike the FED, the European and UK central banking authorities in general have been very cautious about lowering interest rates.

The prospect of labor strikes are everywhere including the recent strike by Shell fuel truck drivers demanding an increase in salary to about £36k per year. The current price of a gallon of gasoline in the UK is about £4.80 pounds. Diesel is £5.20/gallon Just to give you an idea about the flaccid purchasing power of the dollar largely driven by our loose money policy, that's about $10 a gallon if you were renting a car here and paying in greenbacks.

Say Hello to Inflation

Say hello to inflation. There is no doubt that a wave of inflation is setting up to wash over the U.S.

This Can't End Well...

This cannot end well.  This cannot end well for anybody.  While there are clearly a host of forces at work in the world of agriculture today, the decision to remove 30-35% of the corn crop from the food supply will one day soon be acknowledged as a very bad mistake.  At the present time, if there is any benefit going to the consuming public through lower gasoline prices as is alleged by the ethanol supporters, it is being paid for almost exclusively on the backs of poultry, livestock and milk and  egg producers primarily in the United States.  There is just such a woven set of consequences to this that it is hard to pry them all apart.

Ethanol, Beer and the Intoxicating Lure of Consolidation

News comes this week that the Belgium beer brewer, InBev is considering making a move to acquire St. Louis beer maker, Anheuser-Busch. Rapid consolidation in the beer business has been going on world-wide for a long time with many of the local brews with hundreds of years of history in central and western Europe being rolled up into giants like InBev and SABMiller of London. The same has been taking place in Mexico and South America where local beers with brand value are giving way to acquisition as either next generation family members don't want to or can't manage the businesses or the economics of scale make consolidation compelling.

USDA Food Price Inflation Projections for 2008 Have Just Been...Inflated.

The USDA has just raised its expected food inflation numbers to 6% for 2008 on the heels of a 4.2% increase for 2007.

http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2008/05/0130.xml

My best guess is that they will be back to the well to up that again by the end of the summer. The projections show the greatest increase in food prepared at home with eggs, dairy and fats and oils categories leading the charge. Pork is estimated to increase only 1-2 percent this year.

Asymmetry in Rewards for Ethical Behavior

     One of the more effective tactics of those who oppose modern animal production has been to threaten the global brand of final processors and retailers in order to gain negotiating power in attempts to change production methods.  By raising an ethical argument to modern production they have buttressed their assertions against the counter argument from science. 

     This is a very efficient approach since once their notions are accepted by major retailers like Wal-Mart, forcing change down the chain is greatly facilitated.

     Yesterday the Wall Street Journal published the results of an experiment conducted by a doctoral student from the University of Western Ontario. (http://online.wsj.com/article/SB121018735490274425.html)

Global Supply Assurance

Late last week China revealed that it was about to approve a plan to buy large tracts of land in South America and Africa. The purpose of the purchases is to assure that China is not left to the risks of the market place in the future when its own agricultural production is not able to keep up with its growing demand.

China is essentially self-sufficient in food at the present (something that it cherishes) but rising incomes are changing the mix of demand from lower quality vegetarian diets to meat and more refined and processed foods. China has about nine percent of the arable land and the current global food crisis is helping to fuel the long-held desire by China not to be at the mercy of foreigners. China is currently self-sufficient in corn but imports lots of soybeans. As its livestock production ramps up for future demand, it will need to produce substantially more feed stuffs than its own resources currently can support.

Market Weights: Why Producers Choose the Wrong Weight

:     The profit maximizing market weight for pigs is a function of the price received and the costs remaining at the time of the projection.  If you think of a single pig (the simplest case) near the end of finishing, the cost remaining is the last finishing diet.  The decision revolves around estimating the marginal cost of an additional pound and the marginal revenue of that additional pound from the packer.

     The marginal cost is the change in total cost divided by the change in output.  From that formula you can see that no fixed costs enter this calculation.  As the pig grows during the final finishing phase, its marginal feed efficiency is getting worse and in most cases, the lean percent is declining while the yield may be rising slightly.  Both typically impact price paid.  On the other hand, the marginal revenue is typically a step function (rather than continous) and is poised to jump down as the next level of sort loss is overtaken.

Opportunity Costs

Its time to revisit the notion of opportunity costs. Opportunity costs are measured by the value of the next best alternative that you rejected when you make a decision. Opportunity costs and in fact all costs predate the invention of money. Even in our religious and wisdom writings, opportunity costs abound. For instance, what was the cost to humanity of Eve eating the apple? No money exchanged hands but the cost was the loss of paradise in exchange for knowledge. What is the current (and on-going costs) of choosing your current spouse, if you have one? That usually gets the point across.

Costs arise out of scarcity. Since you cannot be married to two people at the same time unless you move to the panhandle of Texas and join a certain religion, you are a scarce resource. When you commit to one, the cost is all you left behind.

Assume you interview two managers for a key position and both have decent resumes but one is clearly more creative, careful and likely to perform above expectations.  You know that you will have to pay her 20% more than the other one or she will be bid away to another farm in a year or two.  You decide to hire the cheaper one at "industry average cost" for managers.  How long will it take for the "average performer" to kill the advantage in salary reduction you received.  On most farms of any size it can be a matter of days.  The opportunity cost of hiring the "cheaper" one is the classic mistake that "cost only" producers constantly make.  Granted it is difficult to know the outcomes in advance on hiring decisions.   

Waiting for Something Better South of the Border-style

     I just returned from about a week in Mexico, in the Jalisco and Sonora regions (western side of Mexico from the USA south to about the level of Mexico City).  Jalisco is the Tequila distilling area and the Agave plants in various stages of development are clearly visible wherever you travel in countryside.  Sonora is prodominately cattle country but the isolation especially has led to many larger swine units developing there in the last 30-40 years.  As in the USA, Mexican producers have been losing money in large amounts for a period probably six to eight months longer than those in the USA.

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