The pain consumers have felt from inflation is significant. Amid rising food inflation, Kellogg’s CEO suggests poor families should “eat corn flakes for dinner”.[1] These comments, broadly insensitive, speak to the severity of the real inflation consumers are facing, much of which is masked by headline inflation metrics.
Further “Greedflation” – when a company hikes prices beyond the rate of inflation inorder to increase profits – is further forcing families to make choices like eating cereal for dinner to save money”[2]. Consider that:
In 2022, consumers spent 11.3% of their disposable income on food, the highest level since 1991[3].
Consumers have been forced to spend about 26% more on groceries in general since 2020[4].
In Canada food prices are expected to increase a further 2.5% to 4.5% on top of already high prices in 2024[5] (we think it could be even higher).
This pain consumers are facing will not abate in the near future in our opinion. In fact, we expect it will become worse. Amidst sustained high prices that are still increasing, there are increasing warnings for those expecting any further softening in inflation, particularly for food prices and so called “agflation”.
Agflation
We have commented twice on the emerging agflation risk – see the original Auspice May Agflation Blog alongside a second Auspice Agflation Blog post July 2023. We broadly think agflation is going to be a risk as it is driven by two factors that central banks rate hikes broadly don’t affect – wages, and commodity prices.
While we are all aware of the current wage pressures from labour shortages, unionization, and aging demographics, for the purpose of this Blog, we’ll focus on the latter, commodities. First, and this relates to inflationary pressures beyond the food supply, there has been a surge in freight rates and the World Container Index (see Chart 1 below). As discussed in the January 2024 Auspice Blog, the number of wars and global conflicts are at the highest levels since WWII[6]. This is likely a key driver in the increase of freight rates, and with the spike just commencing recently in 2024, we likely are on the precipice of higher prices for both raw and manufactured goods.
Chart 1 – 10yr World Container Index Prices, February 1st, 2014, to January 31st, 2024.
Source: Auspice Capital Advisors and Bloomberg, as at February 29th, 2024.
Further, consider Chart 2 below. There are two important things to note:
Agricultural commodity prices – cocoa, cattle, coffee, sugar, corn, and more – things we rely on daily that disproportionately affect lower income families, are on the rise. While the broad base Goldman Sachs (GSCI) and Bloomberg (BCOM) benchmarks continue to consolidate, agricultural prices are making multi-year highs. This does not bode well for future inflation.
In Canada food inflation has persisted, for many factors including shipping, however in the rest of the world, there has been a softening in food prices as seen in the UN Food and Agriculture World Food Price Index. Historically, this food Index tracks agricultural commodity prices – an understandable relationship. Recently there has been a divergence, and particularly as freight rates begin to skyrocket upwards, it is logical to expect global food prices to resume back upwards as agricultural commodity inputs do.
Chart 2 – Agricultural Commodities & Food Prices, February 1st, 2014, to January 31st, 2024.
Source: Auspice Capital Advisors and Bloomberg, as at February 29th, 2024.
We have warned that higher rates can only affect the demand-pull side of the inflation equation (i.e. demand for manufactured goods and consumer spending). Raising rates does little to affect the cost-push side of the inflation equation - inflation driven by wages and commodities. We are seeing this in real time – rates remain elevated, yet many commodity markets have resumed their upwards course. Tight commodity supply coupled with record high levels of global war and conflict does not bode well for future disinflation.
Global elections are taking the news spotlight but the resumption of the commodity supercycle may be of higher importance for investors. Higher commodity prices have implications across asset classes and comes at a time when rates cut expectations have already become muted. The inflation narrative by central banks may start to change and accept this new structural reality.
We are now two years since the Russia/Ukraine volatility peak in broad commodity indices, a normal consolidation period within a broader cycle (see Chart 2 in the Auspice January Blog), and the next move upwards may have begun.
If you don’t have a 5-10% commodity or CTA allocation, connect with us today at info@auspicecapital.com.
DEFINITIONS
The DBIQ Diversified Agriculture Index Excess Return is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities.
The UN Food and Agriculture World Food Price Index (FAO Food Price Index) is a food price index by the Food and Agriculture Organization (FAO) of the United Nations. It records the development of world market prices of 55 agricultural commodities and foodstuffs.
The Drewry World Container Index (WCI) measures the bi-weekly ocean freight rate movements of 40-foot containers in seven major maritime lanes. It is expressed as an average price per 40-foot container (in US$).
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Some of the assumptions and opinions contained herein are the view or opinion of the firm and are based on management's analysis of the portfolio performance.
Prior to February 28, 2023, Auspice Diversified Trust was offered via offering memorandum only and this Fund was not a reporting issuer during such prior period. The expenses of the Fund would have been higher during such prior period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Auspice obtained exemptive relief on behalf of the Fund to permit the disclosure of the prior performance data for the Fund for the time period prior to it becoming a reporting issuer.
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REFERENCES
[1] https://www.theguardian.com/us-news/2024/feb/27/kelloggs-ceo-cereal-for-dinner
[2] https://www.dailymail.co.uk/news/article-13128747/Kelloggs-CEO-slammed-telling-Americans-eat-corn-flakes-dinner.html
[3] https://www.cnn.com/2024/02/26/food/kellogg-ceo-cereal-dinner/index.html
[4] https://www.theguardian.com/us-news/2024/feb/27/kelloggs-ceo-cereal-for-dinner
[5] https://www.dal.ca/news/2023/12/07/canada-food-price-report-2024.html
[6] https://www.auspicecapital.com/alt-invest/2024/2/2/not-a-world-war-but-a-world-at-war