What Inflation?

From Bloomberg:

India's inflation accelerated to a 13-year high and economists forecast higher consumer prices in China after record crude oil forced both nations to increase the regulated cost of fuel.

India's wholesale prices jumped 11.05 percent in the week to June 7, the government said today, more than the median 9.79 percent increase in a Bloomberg News survey of 18 economists. China's fuel price increase today may lift consumer prices by as much as 1 percentage point this year, a separate survey showed.

A near doubling of crude oil prices has pushed up subsidy costs and threatened to erode profits of refiners such as Indian Oil Corp., prompting governments from Indonesia to Sri Lanka to raise fuel prices. That's adding pressure on central banks to increase interest rates and cool inflation, risking growth.

``If China and India are going to continue to roll back subsidies, then clearly we have not seen a peak in inflation,'' said Joseph Tan, a strategist at Fortis Bank SA in Singapore. ``They need to tighten monetary policy, which means that growth is going to slow.''

Considering the spike in commodity prices, this news should not be surprising. There are several things to note from this article.

1.) Spiking commodity prices are hitting everyone -- not just the US

2.) There has been a fair amount of discussion about "de-linking", meaning the US slowdown will not effect the rest of the world. This news should indicate that idea is a fantasy. One of the US primary problems right now high commodity prices which are a prime cause for India's and China's problem.

3.) As long as commodity prices remain high, expect more and more upward pressure on worldwide interest rates

Also consider this news, also from Bloomberg:

German producer-price inflation, an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs.

Prices for goods from newsprint to plastics increased 6 percent from a year earlier, the most since July 2006, the Federal Statistics Office in Wiesbaden said today. Economists expected a 5.8 percent gain, the median of 27 estimates in a Bloomberg News survey shows. Prices rose 1 percent from April.

Inflation has been pushed up by record energy and food prices, crimping consumers' spending power and clouding the outlook for economic growth across the 15-nation euro region. European Central Bank President Jean-Claude Trichet said on June 5 that the bank may increase its benchmark rate next month to rein in inflation expectations.

``The pressure in the inflation pipeline is still very high and will rise in coming months,'' said Andreas Rees, chief economist Germany at UniCredit Markets & Investment Banking in Munich. ``The ECB will point to inflation dangers to justify an interest-rate hike in July.''

Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent.

Trichet has consistently stated that price stability is his primary concern. In addition, EU rates are still higher than US levels -- adding to the euro's overall strength right now.

What Inflation? Part II

Here are two charts that show the year over year increase in CPI and PPI





Things aren't looking that good right now.

What Inflation?

I have a mixed feeling about the possibility of future inflation. On one hand, commodity prices are still increasing. Oil is touching new highs nearly every day and agricultural prices are spiking thanks for floods in Iowa. On the other side, there's an old adage: "nothing cures high prices like high prices." In other words, high prices (in and of themselves) create incentives for people to purchase cheaper substitutes (if they exist) or to produce more of the high-priced good in an attempt to make money.

So, with the two stories listed below the question to ask is, "are these the type of price spikes that will create incentives for lower prices down the road?"

From Bloomberg:

U.K. inflation reached the highest since at least 1997 in May, and Bank of England Governor Mervyn King predicted it will exceed 4 percent later this year, adding to speculation that the economy will fall into a recession.

The Monetary Policy Committee ``is concerned about the present and prospective period of above-target inflation,'' King wrote in a letter to the government, after the Office for National Statistics said consumer prices climbed 3.3 percent from a year earlier last month. ``The path of bank rate that will be necessary to meet the 2 percent target is uncertain.''

.....

Policy makers ``are going to sit on their hands for the time being since there's not really much they can do for the moment,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``They need to see what the economy does first.''

From Bloomberg:

European inflation accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers from the world's richest nations said is becoming a ``more complicated'' dilemma.

The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30.

Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a ``serious challenge'' to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.

With inflation accelerating ``it becomes increasingly difficult to argue against an ECB hike in July,'' said Carsten Brzeski, an economist at ING Group in Brussels. ``However, we still believe that a July rate hike would be a one-off, mainly to flaunt the ECB's willingness to fight any second-round effects.''

Inflation On the Brain

There is a ton of news today about inflation. Consider the following:

From the WSJ:

Inflation worries are heating up around the world and jolting financial markets in the process.

On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation.

.....Also Tuesday, officials in Vietnam effectively devalued their currency in a step aimed at easing market pressures related to soaring inflation rates. (See related article.)

And in the U.S., investors sold off U.S. Treasury securities, one day after Federal Reserve Chairman Ben Bernanke warned that the run-up in oil prices is adding to upside risks for inflation. The price of the two year Treasury note, most sensitive to the Fed's moves, has fallen sharply (and its yield has risen) as investors grow convinced that the central bank may have to raise rates this autumn to contain inflation. On Tuesday, the two-year note's yield was 2.9%, up from 2.4% on Friday, marking a major jump in that rate.

Meanwhile, the Bank of Canada surprised markets Tuesday by holding off on an expected interest-rate cut; the central bank said the risk of inflation, driven by high energy prices, had grown too great to allow for further rate cuts. The European Central Bank is also considering interest rate increases to fend off inflation.

From Bloomberg:

European Central Bank board member Juergen Stark damped speculation of a series of interest-rate increases, saying policy makers have signaled only that they may raise borrowing costs in July.

``The markets have understood the Governing Council's signal,'' Stark, 60, said in an interview in Chatham, Massachusetts, late yesterday. ``However, we are not talking about a series of rate increases.''

ECB President Jean-Claude Trichet said last week the bank may raise its benchmark rate by a quarter-point to 4.25 percent in July to curb inflation, which is running at the fastest pace in 16 years. Investors responded by increasing bets on higher borrowing costs. They expect the ECB to lift the key rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

.....

Oil prices above $130 a barrel and rising food prices pushed inflation in the 15-nation euro region to 3.6 percent in May, well above the ECB's 2 percent limit. Central banks around the world are changing rate policy in response to surging inflation.

Global Policy Shift

Vietnam, Brazil, Chile, the Philippines and Indonesia all lifted borrowing costs this month. The Bank of Canada yesterday unexpectedly kept its benchmark rate unchanged after four straight reductions. U.S. Federal Reserve Chairman Ben S. Bernanke has also signaled the Fed is done cutting rates, saying this week he'll ``strongly resist'' any surge in inflation expectations.

Tie this information to the CRB chart below, especially the following points.

1.) The weekly chart is still in a major rally.

2.) The daily chart is still bullishly aligned

3.) The P&F chart shows a series of multiple new highs.

These developments explain the following statement from Bernanke's most recent speech:

Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention. Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.

NY Fed President Geithner echoed Bernanke's sentiment:

Geithner also said containing global inflation risks will probably require tighter monetary policy. The Fed has cut U.S. interest rates sharply to 2 percent since September, though markets expect it to raise them later this year.

And Treasury Secretary Paulson has supposed dollar intervention which is a de facto way to cure inflation caused by the dropping dollar:

U.S. Treasury Secretary Henry Paulson on Tuesday said he stood by comments made a day earlier in which he said he would never rule out currency intervention as a potential policy tool.

"I'll let my comments stand," Paulson said in an interview with Bloomberg Television. "I never like to say never, but my focus is on long-term fundamentals."

Now -- US officials have talked a good game for awhile, but haven't done anything. Let's see if they are will to act.

Are Beef Prices Headed Higher?

From Blomberg:

Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.

The highest corn prices since at least the Civil War, based on Chicago Board of Trade data, mean U.S. feedlots are losing money on every animal they sell, discouraging production as rising global incomes increase meat consumption and a declining dollar spurs exports. Cattle may rise 13 percent by the end of the year on the Chicago Mercantile Exchange and Brazil's Bolsa de Mercadorias e Futuros, futures contracts show.

Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed. Cattle are the seventh-worst performer of the 26-member UBS Bloomberg Constant Maturity Commodity Index in the past year, a time when soybeans, oil and copper jumped to records. After adjusting for inflation, cattle are down 27 percent from their 1988 peak.

``It's pretty certain that we'll see a decline in domestic supply in the U.S.,'' Joesley Batista, chief executive officer of JBS SA, the world's biggest beef producer, told reporters in Sao Paulo on May 15. ``As a result, we'll have price hikes and improved margins.''

Agricultural/food price inflation has been a hot topic over the last few months. I've been concerned about the long-term spike in prices for about 6-9 months. This is just another symptom of the underlying problem: as the world's standard of loving increases (think India and China making more and more money) people will want better things like steak.

So, let's take a look at a few charts.



On the monthly corn chart, simply notice the huge price spike that's occurred.



On the weekly chart, notice the following:

-- Prices rallied from the summer of 2006 to the beginning of 2007

-- Prices consolidated gains until the fourth quarter of 2007

-- Prices have been rallying strongly since the fourth quarter of 2007



On the weekly livestock chart, notice that prices have been meandering for the better part of two years. But also note that prices have recently moved through a key area of resistance.



On the daily chart, notice that prices have been rallying since the beginning of March, with prices continually moving through key resistance levels. Also note that the shorter SMAs are higher than the longer SMAs, that all the SMAs are moving higher and that prices are higher than the SMAs. This is a bullish chart.

Fed Governor Concerned About Inflation

From Marketwatch.com:

The latest comments form Federal Reserve Bank of Kansas City President Thomas Hoenig also will be scrutinized, as he said late Tuesday that rising inflationary pressures are "troublesome" and a "serious" matter, and now stand at "unacceptably high levels." Hoenig isn't a voting member of the FOMC.

Let's take a look at some of the inflation measures to see how they're doing:



Although it has stabilized, PPI is still at high levels.



CPI has also stabilized, although at high levels as well.



Import prices are spiking. So long as oil is in a rally, expect this trend to continue.



And now for the Shadow Stats alternate CPI measures, just to show you that yes, there is probably more inflation in the system than the Fed wants to admit.

So - who is right? I'm not a statistician so I can't speak to the validity or non-validity of any of these numbers. However, I can tell you there has been a tremendous amount of debate about the US CPI calculation which leads me to believe there is a problem somewhere. However, where it is and to what degree it is impacting the current situation I don't know.

I will add my own observations. I have noticed big food price increases over the last few years. Nothing concrete -- no "prices have increased by x%" -- but I know my food bill is going up and my eating habits have not changed. FWIW.

Rice Price Spikes Leading to Hoarding and Other Fun Problems

From the WSJ's Marketebeat Blog:

Food-related protests have been occurring worldwide, and in the U.S. now major discounters are seeing runs on products, particularly rice, as both Sam’s Club, the Wal-Mart Stores Inc. operated discounter, and Costco Wholesale Corp. have seen shelves cleaned out of rice as consumers worry about higher prices. “It is just unreal what can happen when we get fear being spread as it is now, and when the general populace goes out and starts doing idiotic things like lining up at the Sam’s Club and the Costco and not buying one bag but buying 10 bags just because they might run out,” says Neauman Coleman, introducing broker at Neauman Coleman & Co. in Brinkley, Ark. Sam’s Club has decided to put limits (or rations, if you will) on the amount of 20-pound bags customers can purchase every week, and Costco earlier this week said it was considering such limits as well, which in a way is just as panicky a response.

When was the last time you heard of a food product not being available in he US? Anyone? I don't think it's ever happened in my lifetime for the reasons outlined above.

From CNBC:

Benchmark Thai rice prices leapt more than 5% to a record high above $1,000 a ton Thursday. Meanwhile, Brazil has temporarily halted rice exports to ensure domestic supply amid rising world prices for the grain.

Brazil grows more rice than it consumes and has a reserve that will safeguard the country's supply, Agriculture Minister Reinhold Stephanes said in a statement. Sales abroad will nevertheless be blocked to make sure the country has enough of the grain for the next six to eight months.

.....

Brazil follows on the steps of India and Vietnam, the world's second- and third-largest rice exporters in 2007, in imposing export curbs of rice in a bid to keep prices of the grain under control. Brazil, which is not a major global rice supplier, exported 313,000 tons of rice last year.

Here's the problem. To bring the price down, what the world needs is a massive increase in supply to literally flood the market. However, we're dealing with food -- a basic human necessity. Governments will always do what Brazil is doing -- cutting exports -- in order to protect their citizens from starvation. While that is politically an astute move, economically it's the worst move possible because it limits an already dwindling supply. It leads to charts that look like this:



Notice the following:

-- Prices have continually broken through resistance to make new highs

-- All of the SMAs are moving higher

-- The shorter SMAs are higher than the longer SMAs

-- Prices have continually used the SMAs as support levels for the rally.

Bottom line -- this is a bullish chart that will bring more traders into the market.

Oh yeah -- this won't help the inflationary picture at all.

US Gasoline Consumption Down

From the Kansas City Star:

U.S. drivers are doing something they haven’t done for nearly two decades — consume less gasoline.

Gas consumption so far this year is down about 0.2 percent compared to last year, according to the Energy Information Administration. The federal agency is predicting that gasoline demand will be down 0.4 percent this summer and 0.3 percent for the year.

That may not sound like much, but it would be the first time since 1991 that there’s been a decline in annual gas consumption. And it would be only the eighth year since 1951 in which demand for gasoline has declined.

The federal agency noted that the decline was occurring in part because of a slowing economy. But it also said that higher gas prices were having an effect on demand.

“Sustained higher gasoline prices are beginning to show up in lower gasoline consumption,” said Tancred Lidderdale, an analyst for the Energy Information Administration.

Both gasoline and diesel prices are now at record levels.

Here are two charts from This Week in Petroleum to show where retail prices are:





Notice that instead of falling in the winter, both gas and diesel prices remained at high levels. I think this is an important contributing factor to the slowdown that occurred in the fourth quarter.

Also consider the following graph of oil prices:



Oil has been in a rally for almost a year and a half. Notice the market has continually advanced through previous resistance levels, consolidated gains and then moved higher.


However, we're moving into the summer driving season when demand typically increases:

Since last fall, the average U.S. retail price for regular gasoline has been close to or above $3 per gallon in large part due to high crude oil prices. High crude oil prices are expected to remain an important reason why retail gasoline prices are projected to stay above $3 per gallon for some time to come. As the chart below indicates, we are now in the “time of the season” when gasoline demand begins to increase. As seasonal demand increases, prices tend to rise as well, all else equal. Even though U.S. gasoline demand has been lower than year-ago levels so far this year, EIA still expects that rising gasoline demand over the next few months will drive retail prices higher. So, while gasoline prices have risen above $3 per gallon mostly due to high crude oil prices, increasing gasoline demand will likely take retail gasoline prices to $3.50 per gallon and above, even if year-over-year gasoline demand is negative. The simple fact that more and more gasoline will be used over the next few months will probably be enough to cause retail gasoline prices to increase, even if crude oil prices begin declining, as EIA is currently projecting. Additionally, the cost of making “summer-grade” gasoline (“summer-grade” gasoline produces less smog) is significantly more than making “winter-grade” gasoline, helping to raise retail prices even further during the summer months, all else equal.

Finally, I have two words: India and China. Simply put, US demand is no longer the only driving force of the oil market. There are now over 2 billion more people who've seen their standard of living increase.

Oil Still Rallying

From the AP

Oil prices spiked to a record $117.40 a barrel after a Japanese oil tanker was hit by a rocket near Yemen and militants in Nigeria claimed two attacks on pipelines.

The 150,000-ton tanker Takayama was attacked about 270 miles off the east coast Yemen coast in the Gulf of Aden while it was heading for Saudi Arabia, its Japanese operator, Nippon Yusen K.K., said in a statement.

None of the ship's 23 crew members was injured. Hundreds of gallons of fuel leaked before a 1-inch hole in the tanker's stern was repaired, the company said.

Kyodo News agency reported that the Japanese tanker was fired on by a rocket launcher from a small boat.

Light, sweet crude for May delivery reached $117.40 a barrel but fell back to $116.88 by midday in Europe, up 19 cents from Friday's closing price.

On the daily chart, notice the following:

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

-- Prices are above all the SMAs

-- Prices have rallied and consolidated which is a very health bull market formation



On the weekly chart, notice we've had an incredibly strong rally. Prices have been rising for the last year. As they have risen they have consolidated their gains which allows some traders to take profits and others to get in. This is a bull market chart.

What Inflation?

From the WSJ:

Americans feeling the pain of record gasoline prices now face the likelihood of another fuel shock, from natural gas.

Prices in the U.S. have risen 93% since late August as power-hungry nations like South Korea and Japan compete in a global natural-gas market that scarcely existed a half-decade ago. Still, U.S. prices are as low as half the level of some overseas markets, suggesting they have much further to rise.

The global appetite for natural gas has profound implications for a U.S. economy already tipping toward recession and struggling against inflation pressures. The fuel heats half of U.S. homes, generates 20% of the country's electricity and is used to make everything from fertilizer to plastic bags. In March, rising natural-gas prices contributed to a higher than expected 1.1% increase in producer prices, according to the Labor Department.

U.S. natural-gas output has actually been rising in recent months, and not everyone agrees that prices are destined to surge. However, a significant number of financial players are now betting on an increase.

Let's look at the chart to see what's going on.



The above chart shows a strong rally. Notice the following:

-- Prices have almost double since last September

-- All the SMAs are moving higher

-- Prices are above the SMAs

-- The shorter SMAs are above the longer SMAs

-- There is a strong uptrend in place



However, the multi-year chart shows the natural gas market is especially prone to price spikes. So, that's what we could be dealing with here.

What Inflation?

From Bloomberg:

European inflation accelerated more than initially estimated in March, reinforcing the European Central Bank's resistance to cutting interest rates even as economic growth cools.

The inflation rate rose to 3.6 percent last month, the highest in almost 16 years, the European Union's statistics office in Luxembourg said today. The March figure is up from 3.3 percent in February and exceeds an estimate of 3.5 percent published on March 31.

Food and energy prices stoked inflation in March, and the euro extended its gains after the report, rising to a record against the dollar. ECB Executive Board member Juergen Stark yesterday said interest rates may not be high enough to contain inflation, while Greek colleague Nicholas Garganas said price pressure ``is more intense than previously foreseen.''

``Concerns about upside risks to the inflation outlook are unlikely to ease quickly, leaving little, if any, scope for the ECB soften its interest-rate stance,'' said Martin van Vliet, an economist at ING Group in Amsterdam. ``This may help push the euro-dollar to $1.60 in the short term.''

....

Food-price inflation accelerated to 6.2 percent in March from 5.8 percent in February, the highest since Eurostat began the current series in 1997. Rice climbed to a record $22.67 per 100 pounds today on rising demand and as floods delayed planting in the U.S. Wheat, corn and soybeans also have risen to records.

Energy-price inflation accelerated to 11.2 percent from 10.4 percent, the highest since May 2006. Crude oil has risen 79 percent in the last 12 months and reached a record above $114 a barrel yesterday.

First, notice that at least we're not the only country that is dealing with spiking inflation.

Secondly, notice the European Response -- not raising rates. The reason is the European Central Bank (ECB) is less concerned with preventing a recession. Instead, they view their mandate as inflation fighters or as promoters of price stability as extremely important. As a result, the euro is rallying:



On the chart, notice the following:

-- Prices have been rallying since 2006

-- Prices have continually moved through previous levels of resistance to hit new levels.

-- After hitting new levels prices consolidate, shaking out some players who take profits and inviting new players in to take new positions.

From Bloomberg:

Rice climbed to a record for a second day as the Philippines, the world's biggest importer, sought 1 million metric tons and floods delayed planting in the U.S., increasing concern of a global shortage.

The Philippines will hold a tender tomorrow for 500,000 tons of rice, with another to follow on May 5. A March tender filled just 61 percent of requirements at prices double those six months earlier. Last year, the country imported 1.9 million tons of rice, equivalent to about 15 percent of annual needs. Food lines have formed as people wait for rice.

Rice in Chicago surged 2.3 percent today to $22.67 per 100 pounds on rising demand and export curbs from some producing nations, stoking global concern about inflation and the potential for social unrest. Rice, the staple food for half the world, has more than doubled in a year. Wheat has gained 93 percent in that time, while corn is up 61 percent.

``We've seen an unprecedented bull run in rice prices,'' Luke Chandler, senior commodities analyst at Rabobank Group, said in an interview today with Bloomberg Television. ``It's almost becoming like a supply shock because the countries that rely on the imports aren't able to access the available sources.''

Here's a chart:



Notice the extreme price spike in rice's price. This is an unsustainable move up in the long run -- meaning prices are really over-extended. But the problem is there is panic buying going on which will really spike prices hard in the short run. As a result, don't be surprised to see rice continue to move higher.

But it's not just rice:

U.S. rice, corn and crude futures soared to record highs Tuesday on supply concerns, in turn boosting gold on inflation worries.

On the New York Mercantile Exchange, the front-month crude settled up $2.03, or 1.82%, at $113.79 on a combination of supply issues, rising diesel demand in China and persistent dollar weakness. Crude futures later rose to a record high of $114.08 after settlement.

Rice and corn futures rocketed to all-time highs on tight world grain supplies and planting delays, with the rally in crude providing an additional boost to grains.

Chicago Board of Trade rice prices have doubled since last September, with Asian prices soaring even more sharply since January as big importers have rushed to build stocks on fears that supplies will become scarce as exporters clamp down on shipments.

Here is a chart of corn:



Notice prices are in a solid uptrend; they have moved through previously established resistance to establish new highs and then have sold-off to previously established upward sloping trend lines. This is a bullish chart.



Notice that oil has the same pattern as corn; prices have continued to rise, consolidate gains and then continue to move higher. Oil has a clear support level as well.

What Inflation?

From the BLS:

The Producer Price Index for Finished Goods increased 1.1 percent in March, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This advance followed a 0.3-percent rise in February and a 1.0-percent increase in January. At the earlier stages of processing, prices received by producers of intermediate goods rose 2.3 percent after increasing 0.8 percent a month earlier, and the crude goods index advanced 8.0 percent following a 3.7-percent rise in February.

Among finished goods, the increase in the index for energy goods accelerated to 2.9 percent in March from 0.8 percent in the preceding month. Prices for finished consumer foods turned up 1.2 percent after declining 0.5 percent in February. By contrast, partially offsetting the acceleration in finished goods prices, the rise in the index for finished goods less foods and energy slowed to 0.2 percent from 0.5 percent in February.

For God's sake -- can we please get off the "ex-food and energy" crap? I know of no one -- and I MEAN NO ONE -- who is not effected by food and energy prices. Over the last week we have seen earnings reports cite increasing energy costs as a price reason why profit growth is slowing. And yet the BLS is still trying to tell us that "ex food and energy" prices are decreasing. Please, stop this spin now. I want to get off.

All that being said, notice the increasing rate of prices all through the first paragraph. You can thank rising energy prices for most of it. But regardless of the reason, it looks like we're in for a less than fun ride on the inflation roller coaster.

More Reasons For Spiking Food Prices

From the WSJ:

For all the economists and consumers who hope high food prices are temporary, here's one reason why they probably won't be: Farm costs are skyrocketing, making permanently higher prices essential for farmers to keep expanding production.

Inflation is biting farmers world-wide. In New Zealand, farm wages are up as much as 20% this year, and the average price of a dairy cow has jumped to more than $1,900 -- almost double last year's average of about $1,000. In Thailand and Indonesia, farmers are complaining about sharp increases in the price of fertilizer and diesel fuel.


In the American Midwest, land prices have jumped, along with the cost of energy and chemicals. The price of diammonium phosphate, a common fertilizer, is about $1,200 a ton in the U.S., up from about $450 a ton a year ago.

"Diesel, fertilizer, insecticide, grass-killing chemicals, they're all going up -- just like a shadow," says Samear Ruengrit, a 57-year-old farmer who grows rice about 45 minutes north of Bangkok. His average costs are now about 50% higher than last season, he says.

Farming costs are climbing for several reasons. Higher fuel prices make it more expensive to run tractors and other equipment, while pricier natural gas -- needed to make some fertilizers -- has also played a role. Equipment prices are rising because of strong demand for farm machinery in China and other developing countries, along with rising costs for raw materials like steel.

Wages are up in some parts of the world because many farms are expanding to meet higher demand, putting pressure on labor supplies, especially in countries like Australia where many workers are already occupied in commodity-based trades like mining.

Cost pressures have intensified over the past six months. Many farm suppliers and equipment dealers held back on price increases in 2006 and 2007, despite their own higher energy and labor costs. Now, after a year or more of strong markets for corn and other crops, those suppliers are deciding farmers can afford to pay more -- and they are passing costs along.

OK -- let's add a bit more depth to some of these points. Also remember -- I'm a city boy; I don't know nothin' 'bout no farmin'."

First, let's look at some charts of raw material prices:



Natural gas prices have two periods with the possibility of a third emerging. The first period occurred in the 1990s with prices fluctuating between 1.5 and 3.5 (roughly). Prices spiked out of this range once in 2001 - 2002. The second period occurred between occurred between 2003 and early 2008 with prices ranging from 5.25/5.50 to 8.25/8.50 or so. Prices have advanced from this range since the start of 2008. However, prices also spiked in 2001 - 2002 and late 2005 and returned to the previously mentioned range, so we'll have to wait and see how this plays out.



Oil has rallied since the beginning of 2002 and has risen since 214% since the beginning of 2004. It has continually broken through previous resistance to set new highs.

Let's look at some corporate earnings, courtesy of Morningstar.com

Here is Cat's 10-year earning history:



Although Cat has not been the best performing stock:



And here is John Deere's earnings:



It's chart is far more impressive:



And the fertilizer field is literally on fire right now.

Here is a chart of Mosaic's earnings from Morningstar:



And Mosaics chart -- which is also very impressive:



Monsanto's earnings have a solid upward trend:



As does it's chart:



Potash -- which has been a hot company chart wise -- has a good earnings record but they have dipped:



But the chart is on solid:



Bottom line -- the companies that supply raw materials, physical capital and other materials to the agricultural industry are doing very well right now.

Expecting More Bad Inflation News

Next week we get CPI and PPI. I have little hope these numbers will be anything but terrible for a few reasons.

First, last week's import price number was terrible.

The U.S. Import Price Index increased 2.8 percent in March, the Bureau of Labor Statistics of the U.S. Department of Labor reported today, as higher prices for both petroleum and nonpetroleum imports contributed to the advance. The rise followed 0.2 percent and 1.5 percent increases in February and January. Export prices rose 1.5 percent in March, after advancing 1.1 percent and 1.2 percent for the
prior two months.

The price index for overall imports rose 2.8 percent in March, led by a 9.1 percent advance in petroleum prices. Petroleum prices resumed an upward trend following a 1.9 percent downturn in February. Prices for petroleum rose 60.0 percent for the year ended in March following a comparatively modest 3.1 percent rise over the previous 12-month period. A 1.1 percent increase in nonpetroleum prices also contributed to the overall rise and was the largest one-month increase for the index since nonpetroleum prices were first published on a monthly basis in December 1988. The price indexes for overall imports and nonpetroleum imports also advanced for the March 2007-08 period,increasing 14.8 percent and 5.4 percent, respectively.

Inflation expectations are far from grounded, as represented by gold:



The market has been rising for about three years. It has continually moved higher, consolidated and continued its upward move. Also notice how it has used the 10, 20 and 50 SMA for support at various times.



On the daily chart notice the following:

-- Prices recently broke a two month uptrend

-- Prices are moving in a downward channel

-- The 10 and 20 SMA crossed below the 50 day SMA

-- Prices just bounced off the 50 day SMA

This chart could indicate that traders are backing off gold for now. But put this chart in context with the longer term chart above. We'd need to see a lot more technical damage before we could say expectations had reversed.

But most importantly, we're seeing food riots across the globe and requests for help:

The president of the World Bank on Sunday urged immediate action to deal with mounting food prices that have caused hunger and deadly violence in several countries.

Robert Zoellick said the international community has "to put our money where our mouth is" and act now to help hungry people. "It is as stark as that."

He called on governments to rapidly carry out commitments to provide the U.N. World Food Program with $500 million in emergency aid it needs by May 1.

"It is critical that governments confirm their commitments as soon as possible and others begin to commit," Zoellick said. Prices have only risen further since the WFP issued that appeal, so it is urgent that governments step up, he said.

Clearly there are shortages in a lot of places right now. Shortages usually have a way of spiking prices further.

Also see this article from the front page of today's WSJ:

Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plagued the world periodically since before the time of the Pharaohs: food shortages.

Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank -- putting huge stress on some of the world's poorest nations. Even as the ministers met, Haiti's Prime Minister Jacques Edouard Alexis was resigning after a week in which that tiny country's capital was racked by rioting over higher prices for staples like rice and beans.

As food prices soar, protests are breaking out around the world, including this riot Saturday in Port-au-Prince, Haiti.

Rioting in response to soaring food prices recently has broken out in Egypt, Cameroon, Ivory Coast, Senegal and Ethiopia. In Pakistan and Thailand, army troops have been deployed to deter food theft from fields and warehouses. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. Those could include Indonesia, Yemen, Ghana, Uzbekistan and the Philippines. In countries where buying food requires half to three-quarters of a poor person's income, "there is no margin for survival," he said.

Also see this post from last week.

Import Prices Spike Hard

From the BLS:

The U.S. Import Price Index increased 2.8 percent in March, the Bureau of Labor Statistics of the U.S. Department of Labor reported today, as higher prices for both petroleum and nonpetroleum imports contributed to the advance. The rise followed 0.2 percent and 1.5 percent increases in February and January. Export prices rose 1.5 percent in March, after advancing 1.1 percent and 1.2 percent for the prior two months.

The price index for overall imports rose 2.8 percent in March, led by a 9.1 percent advance in petroleum prices. Petroleum prices resumed an upward trend following a 1.9 percent downturn in February. Prices for petroleum rose 60.0 percent for the year ended in March following a comparatively modest 3.1 percent rise over the previous 12-month period. A 1.1 percent increase in nonpetroleum prices also contributed to the overall rise and was the largest one-month increase for the index since nonpetroleum prices were first published on a monthly basis in December 1988. The price indexes for overall imports and nonpetroleum imports also advanced for the March 2007-08 period, increasing 14.8 percent and 5.4 percent, respectively.

Here's the chart from econoday:



For those of you who want some more info, here are two pieces I wrote earlier this week:

What inflation

What inflation, part II.

What Inflation?

From the WSJ:

Inflation is back.

After several years of relative stability, a wave of rising prices is washing over the world economy.

It comes at a most inconvenient time. The Federal Reserve is sharply cutting U.S interest rates -- the opposite of the usual response to rising inflation -- to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated.

.....

On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years, threatening recent strides in poverty reduction. The IMF forecast consumer prices in emerging and developing countries will rise 7.4% this year, the most inflation since 2001 though still well below the double-digit levels of the recent past.

.....

But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. Increasing demand for natural resources among developing economies such as India and China has pushed up prices for raw materials world-wide. Oil-supply constraints have sent crude-oil futures surging above $112 a barrel Wednesday, a new record, resulting in rising fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren't facing recession. That is putting upward pressure on their prices. Additionally, years of easy credit earlier this decade -- the result of a global quest to avoid falling prices, or deflation -- are a contributing factor.

We've been talking about this trend for some time now. Here's what the Fed saw in their latest minutes:

In the United States, the headline CPI continued to rise rapidly in January but was flat in February. For those two months on average, the rate of headline inflation was down significantly from its elevated level in the fourth quarter of 2007, as retail energy prices stopped rising and core inflation moderated a bit; these two factors more than offset an acceleration of food prices. However, the increase in world petroleum prices in early March pointed to a renewed burst of energy price inflation in the near term. Available information, including producer prices for February, suggested that prices of core personal consumption expenditures (PCE) moved up a bit more slowly than the core CPI in January and somewhat faster than the core CPI in February. Household survey measures of expectations for year-ahead inflation jumped in March to their highest levels in about two years; in contrast, survey measures of longer-term inflation expectations were unchanged or up slightly.

And here's what they saw in their latest policy statement:

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

So -- what does all of this mean?

First, this is not going unnoticed. At the policy level that is extremely important. Once the inflation genie gets out of the bottle it's incredibly difficult to get back in. The last thing anybody wants is to play catch-up to inflation.

Secondly, the Fed is in a terrible policy bind. On one hand, they have an economy to mend and a financial system to fix. Central to fixing both is greasing the wheels of capitalism, which means lowering interest rates. But that helps to encourage inflationary growth at a time when inflation is already increasing.

Third, the US is no longer the world's only leading consumer of raw materials. As such, a slowdown in US demand won't be the world-wide cure all for spiking inflation. We have to rely on India and China to deal with their respective inflationary levels.

What Inflation?

From the WSJ:

Federal energy officials expect oil to average $101 a barrel this year, a sharp upward revision from its earlier forecast that suggests prices will remain above $100 for some time.

But the U.S. Energy Information Administration expects American drivers, truckers and airlines to use less fuel this year as the economy softens. That could take some pressure off prices for gasoline and other fuels, and could keep the price of gasoline under a U.S. average of $4 a gallon.

Just months ago, $100-a-barrel oil seemed an aberration -- a price surge driven by speculators that would soon slip back to more reasonable levels. But the move by the agency -- usually a price bear that had predicted $87-a-barrel oil in January -- suggests $100 oil could be the new norm this year.The arm of the U.S. Energy Department also doesn't anticipate much relief next year, when it sees prices averaging $92.50 a barrel.

Crude oil for May delivery fell 59 cents a barrel, or 0.5%, to $108.50 Tuesday on the New York Mercantile Exchange. Oil hit a record high of $110.33 March 13.

Contrary to warnings from many analysts, the agency believes gasoline prices will remain below $4 a gallon in the U.S. during the height of the summer driving season. The government sees gasoline prices peaking in June at $3.60, up from the national average of around $3.33 now. The U.S., consumer of nearly a quarter of the world's daily crude production, is expected to use 85,000 barrels a day less this year in liquid fuels than in 2007, the agency said.

No one really knows where prices will end up -- despite their best intentions and good faith efforts to try and figure it out. However, here is the basic issue with energy demand: so long as India and China are still growing at strong clips, expect more upside price pressure. Those two countries add 2 billion people to the demand side of the equation.

Let's look at some charts.



On the daily for oil, notice the following:

-- Prices were in an uptrend from early February to early March

-- Prices broke this trend, but have remained above the $100 level

-- Prices are consolidating above $100 level in either a triangle or rectangle formation

-- The 10 and 20 day SMAs are bunched together, indicating they are looking for direction.

-- Prices remain above the 50 SMA



On oil's weekly chart, notice the following:

-- Oil started a rally at the beginning of last year.

-- Throughout the course of that rally, oil has moved through resistance and then consolidated price gains.

-- It has used the 10 and 20 week SMA as support

Short version: oil's charts are incredibly strong and show no sign of reversing.

As a result, prices are the pump are noticeably higher.





As a result of high fuel prices, we're starting to see protests from truckers:

Tons of freight idled across the country Tuesday as independent truckers pulled their rigs off the road while others slowed to a crawl on major highways in a loosely organized protest of high fuel prices.

Using CB radios and trucking Web sites, some truckers called for a strike Tuesday to protest the high cost of diesel fuel, hoping the action might pressure President Bush to stabilize prices by using the nation's oil reserves.

"The gas prices are too high," said Lamont Newberne, a trucker from Wilmington, N.C., who along with 200 drivers protested at a New Jersey Turnpike service area. "We don't make enough money to pay our bills and take care of our family."

On the Turnpike, southbound rigs "as far as the eye can see" staged a short lunchtime protest by moving about 20 mph near Newark, jamming traffic on one of the nation's most heavily traveled highways, authorities said.

While we're looking at commodity prices, let's look at agricultural prices because they have also been spiking



On the daily chart, notice the following:

-- Price have broken through the support of an upward sloping trendline started in late November 2007

-- Prices are below the 50 day SMA and are heading lower

-- The 10 day 20 day SMAs are both headed lower and have moved through the 50 day SMA

-- Prices are consolidating below the 50 day SMA



-- Prices have continually moved through previously established resistance and consolidated those gains

-- Prices are still in a confirmed uptrend

The reason agricultural prices are so important is there are food riots in various countries across the globe and governments are curbing exports:

As well as the riots in Egypt, rising food costs have been blamed for violent unrest in Haiti, Ivory Coast, Cameroon, Mauritania, Mozambique and Senegal. Protests have also occurred in Uzbekistan, Yemen, Bolivia and Indonesia.

China, India, Pakistan, Cambodia and Vietnam have curbed rice exports to ensure there is enough for their own people.

Most commodities are priced in dollars. Therefore a dropping dollar is a de factor price increase.



On the daily chart, notice the following:

-- Prices consolidated in the 74 - 77 range from late November to late February.

-- Prices broke through support and have since fallen about 3.3%

-- Prices are consolidating in a triangle consolidation pattern

-- The 10 and 20 day SMAs are bunched together, indicating a lack of direction.



On the weekly chart, notice the following:

-- Prices have continually moved lower, falling through support

-- After falling through support, prices have consolidated their drop and then moved lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the SMAs

All of this leads to high inflation in the US:

What Inflation?

From Bloomberg:

From Cairo to New Delhi to Shanghai, the run on rice is threatening to disrupt worldwide food supplies as much as the scarcity of confidence on Wall Street earlier this year roiled credit markets.

China, Egypt, Vietnam and India, representing more than a third of global rice exports, curbed sales this year, and Indonesia says it may do the same. Investigators in the Philippines, the world's biggest importer, raided warehouses last month to crack down on hoarding. The World Bank in Washington says 33 nations from Mexico to Yemen may face ``social unrest'' after food and energy costs increased for six straight years.

Rice, the staple food for half the world, rose 2.4 percent to a record $20.985 per 100 pounds in Chicago today, double the price a year ago and a fivefold increase from 2001. It may reach $22 by November, said Dennis DeLaughter, owner of Progressive Farm Marketing in Edna, Texas.

I touched on this story on Friday, which also included a long-term (15-year) price chart. The encouraging part of that price chart was the rice market has been through similar spikes and price retreats in the past. My guess was the reason for the spike was the growth of Asian economies. As these economies grow standards of living rise. This increases demand for food. But as demand rises new and/or better sources of rise production are developed which eventually lowers prices.

The problem right now is the increase in social unrest as it relates to some of these countries. Simply put, food riots are bad.

What Inflation?

From Bloomberg:

India's inflation accelerated at the fastest pace in more than three years in the week ended March 22. Philippine inflation quickened at the fastest pace in 20 months in March. Consumer prices gained 8.7 percent in February in China, an 11-year high. Food prices in the country, based on a government index, jumped 28 percent in February, the most since July.

The tug of war between commodities bulls and bears continues, with the bulls winning.

Thailand, the world's biggest rice exporter, pledged to maintain supplies and India vowed to crack down on hoarding as shortages drove prices to a record and threatened to trigger protests in Asia and Africa.

The nation ``has enough rice for export to neighboring countries'' and may be able to deliver as much as 1.2 million tons a month, Prasert Gosalvitra, head of the rice division of the farm ministry, said today in Bangkok. Thailand has shipped about 1.1 million tons a month since October, he said.

Rice, the staple food for about 3 billion people, gained 1 percent to its highest ever in Chicago today after doubling in the past year. Higher imports by the Philippines, the biggest buyer, and export cuts by China, India, Egypt and Vietnam pushed up prices, contributing to food riots in Ivory Coast and anti- hoarding campaigns in Pakistan and the Philippines.

``We expect a significant rise in prices, well above the long-term average, in the short-to-medium term,'' Les Gordon, president of the Rice Growers Association of Australia, said today. Population growth, urban encroachment on land, and rising grain prices are contributing to the increase.

Notice the use of the phrase "anti-hoarding campaign" and "food riots." We're no longer in a hypothetical "what if this happens" world. We're in a harsh reality that is impacting people's lives in a very negative way.

And here's a chart of rice



Notice the following:

-- All the simple moving averages are moving higher

-- The shorter SMAs are above the longer SMA

-- Prices are above all the SMA

-- Prices have continually consolidated and moved higher

-- Prices have continually broken through previous resistance



On the monthly chart, notice the following:

-- Prices are are all-time highs by a wide margin

-- Rice has had three other price spikes over the last 15 years, all of which were temporary

-- At the end of 1993 and at the beginning of 2004 there were large price spikes, followed by sell-offs. Both lasted about a year, with the 1993 spike having an equal amount of time of build-up and sell-off which the 2004 spike had a longer build-up and faster sell-off

-- There was a longer build-up from 1005-1997 followed by a gentler decline from 1997 - 1999.

The point of looking at the weekly chart is to demonstrate rice is a pretty volatile market that has been through ups and downs in the past 15 years. Rise is a staple of the Asian diet and the Asian region has grown over the last 15 years at strong rates. Putting these two facts together you get natural ebbs and flows in the price cycle.