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Commodity prices rise, squeezing companies and nations

Dec 21, 2010 10:35 AM

The rising price of key inputs is putting pressure on major entities in both the private and public sector, forcing regulators, officials, logistics managers and company executives to confront the fact that as the world returns to economic health, demand is once again outpacing supply. Important commodities like cotton, wheat, silver and oil have all gained significantly in the past year, and some appear to be gathering momentum for further gains in 2011.

The agricultural giant ConAgra Foods, Inc. said Tuesday that inflation caused by factors like rising grain futures and shortfalls in some harvests would force it to raise prices. In fact, the company is counting on price increases to maintain and grow its profits next year.

"Very importantly, we are increasing net pricing on a number of our products given the ongoing acceleration of cost inflation," ConAgra chief executive officer Gary Rodkin said in the latest earnings report. "Some price increases have recently been implemented, and more are under way. We are confident that the net effect of these pricing increases will be positive, despite some potential modest volume decline."

ConAgra also suffered from a potato crop that was unusually weak and low-quality, raising the overall cost of goods like french fries.

"In aggregate, it was a challenging quarter," according to Rodkin.

Those challenges extend to national governments seeking to maintain as much food price stability as possible, in the interests of social justice and stability. In Canada, for instance, lower-income households are being squeezed by the rising cost of sustenance - particularly in the area of healthier foods. A report from the Institute for Competitiveness and Prosperity in Toronto found that "the percentage of income needed to purchase a healthy basket of food for a single person on social assistance rose by 10 percentage points between 2005 and 2009 alone, highlighting the mounting pressure faced by social assistance recipients to afford a nutritious diet."

On the other side of the world - and the per-capita income scale - China is struggling to deal with the impacts of rising food inflation. The China Reserves Grain Corporation, which helps maintain grain price stability, recently sold 1.5 million metric tons of wheat to China's largest flour supplier, taking no profit. Grain imports may increase by as much as 35 percent in the next year.

"The Chinese wheat sales are a sign of shortage and desperation to control inflation," Jim Gerlach, the president of A/C Trading Inc, told Bloomberg/BusinessWeek. "The fear of food shortage will lead the China government to import more grains to rebuild stocks."

Though Chinese incomes have grown strongly over the past decade, much of the country is still trapped in grinding poverty. Even mild increases in the price of staples like wheat noodles and rice can strongly impact tight household budgets. In addition, the growing Chinese middle class is adopting tastes from around the world that are more resource-intensive, buying family cars and larger quantities of meat.

As emerging markets like Brazil, India and China come into their own, the growing needs of both the poor and the middle class will put pressure on global food suppliers to increase production of wheat, corn, soy and other vital products. Energy futures will also rise, with oil production either at or past its peak and a renewables revolution still on the horizon.

The next decades may well be characterized by another surge in commodity price inflation.

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