The price of milk is rising.
“Consumers face price increases of 3p on a pint… because of a shortage caused by the wet weather,” says Valerie Elliott in this morning’s Times.
Now it’s not exactly a headline-making crisis of Peak Oil proportions, but make no mistake – this is a structural change that you’re going to be hearing a lot more about in years to come.
Milk – and plenty of other foodstuffs – are all getting more expensive. And unfortunately, this problem won’t just disappear with the flood waters…
Prices of milk in the UK are rising after First Milk, Britain’s largest dairy co-operative warned that it won’t be able to fulfil its supply contracts, because of a slump in milk yields this summer.
The problem’s been caused by the wet weather forcing farmers to keep their cows indoors, which reduces the amount of milk they produce. The amount produced per cow per day has averaged 17-18 litres over the past two months, from a more usual average of 20 litres.
So it means a shortage of liquid milk – which will push up prices for supermarkets and retailers. But why worry, you may ask? Just like the floods, this is a short-term blip – it’ll go away. Surely the supermarkets can absorb the pain in the meantime?
But while the supply problem may well ease up as the weather improves, demand pressures aren’t going to go away.
You see, it’s not just the UK that’s having problems. Consumers in East Asia aren’t just driving up prices of metals and oil – they are also driving up demand for foodstuffs, or soft commodities. As people get richer, they tend to eat more calorific food, including more meat, and more dairy produce.
This demand surge is being felt across the world. US ice cream makers are hiking prices, for example. And it’s not just happening in the milk sector. In the States, food prices rose by 7.3% in the first quarter alone. On top of the boom in Asia, the drive for alternative fuels, and corn-based ethanol in particular, has pushed the price of corn higher. As the price rose, so farmers have planted up more corn, which squeezes the land available for other crops.
Now the surge in corn planting has seen the price of the crop level off somewhat, but even so, higher corn prices mean higher feedstock prices. And that makes cows, pigs and chickens more expensive to feed and maintain, which in turn makes their meat more expensive. And of course, rising energy costs also make it more expensive to run a farm, putting more upward pressure on prices.
As Elliott says: “Insiders believe the era of cheap food in Britain is coming to an end, and that they [retailers] will have to pass on increases to customers in the autumn.”
If you want to read about how you can invest in the companies that might profit, have a read at our cover story from May: Harvesting profits (http://www.moneyweek.com/file/29493/how-to-profit-from-rising-food-prices.html).
We also look at the dairy sector specifically in this week’s issue of MoneyWeek, which is out on Friday.
If you’re not already a subscriber, you can sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek. (http://www.moneyweek.com/file/194/subscribe-from-not-logged-in.html)
Of course, it goes without saying that this inflationary pressure is coming just at the wrong moment for a world economy grappling with the consequences of too much debt being dished out too carelessly. Just at the time when many investors would like to see an interest rate cut, central banks will be coming under pressure to push them higher.
In fact, Doug Williams of the Centre for Economics and Business Research reckons that the official consumer price index inflation measure may even breach the Bank of England’s upper limit of 3% later this year, which would force Mervyn King to write his second letter to the Treasury.
It’s yet another good reason to hike the base rate this Thursday. We suspect that while rates will probably remain on hold, given the fear currently rattling through the markets, the vote will be closer than anyone currently believes.
Source-Money Morning