Hey Russell, I just wanted to say a big thank you for the work you are doing! As a young reader who is loving learning about markets but isn't quite able to fit the paid subscription in my budget yet, this content is seriously invaluable. You have a real talent for breaking down the complexity when discussing the interplay between all these macro factors which really helps less market savy people improve their understanding. Keep it up!

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Food, during normal times should be more-or-less abundant. Ancient societies would aim to make more than they needed and burn any remainder as an offering. Now we just subsidise domestic farmers to compete with imports that benefit from lower wages, less regulation and/or more productive land. Then we throw most of it away.

Farmers are therefore perennial price takers and never make any money (unless they can export surpluses) because their product is structurally over-produced. Processors and distributors (merchant or government) can make money most of the time - but do also tend to get lynched when there's a shortage. Prices can shift from pennies to blood fairly rapidly.

At the other extreme, food is one of the first things people decide to spend more money on when they feel they can. Think of the spice trade and the barbarity what was undertaken (on top of the treasure spent) in the name of slightly fancier food. It boggles the mind.

So very bad things happen when people don’t have the food they crave – be that for status or survival. Those in charge have learnt that shortages are very dangerous and not really worth the short-term profits they might generate. They tend to work hard to ensure there’s plenty to go round. Enough to be sure. And then some to spare.

All this makes food an odd sort of good from an economic perspective. Crushing pressure on producer prices. Almost limitless money on offer for the right food on the right table. Usually someone getting rich in the middle but it’s hard to know who. Salt Bae aside.

In the modern developed world both processes are hard at work. Industrial/tech, subsidized farming methods at home competing with low cost imports keeping the raw cost of food nailed down. The near limitless demand for fancy food mean that high prices can co-exist with extraordinarily cheap stables on supermarket shelves. You can eat for a month on £10 or blow it on a snack. Either way, the processing, packaging and distribution of food makes up most of the cost faced by consumers. Especially when they use delivery apps. The farmers get next to nothing.

Over time, rising wages can lead to higher demand for imported food and luxury items (which tend to carry less elastic supply dynamics) over those cheaper, more abundant products. Or reduced willingness to accept cruel, industrial farming methods. Or rising demand for fresh food with a short shelf life. Or retailers just writing “farm” on the label and charging a bit extra.

These seem to me to be the major wages => higher food price mechanisms. We can write some of this this off as a quality adjustment, though official price measures struggle to enumerate subjective differences. Most don’t even try.

What about when we see shortages? With sporadic shortages of a particular product, we can just pay a bit more for imports, with the costs typically borne by lower margins for processors and distributors.

Even when a serious shortage does occur, substitution effects would normally take care of things - though this is another factor that most official inflation measures struggle to account for.

The counter example is the failure of cabbage harvests in South Korea in 2010. That was a real food price inflation story. South Koreans do not substitute for kimchi, apparently. https://www.koreatimes.co.kr/www/news/biz/2010/10/123_73849.html

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China pork prices are higher because of both ASF and the general pull on US exports. If they weren’t higher, the US would not export to China.

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USD looking very strong. Interested to see the impact of USD strength v global food inflation if it plays a major factor and/or if it is included in the next pieces. Cheers

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Mar 28, 2022·edited Mar 28, 2022

Depends on whether you are talking about wholesale prices or retail prices.

If talking about wholesale prices, obviously the less processed and closer to the cheapest production will be lower as a matter of course, meaning that the primary input of labor is only important for the production, maintenance, and transport of food (and the layers of labor cost with additional processing steps).

If talking about retail prices, then your analysis makes perfect sense.

One also has to remember that U.S. food prices are enormously subsidized at basically every level.

It's subsidized at the farmer level, it's subsidized at the transport infrastructure level, it's subsidized at the energy production level, it's subsidized at the point of sale level (some retail prices are lower than wholesale prices due to the use of low cost staples as loss leaders being a widespread and persistent trend in the highly competitive U.S. supermarket dynamic).

It also depends on if you are measuring the same basket of goods or if you are measuring different baskets of goods.

If we are talking about something like the U.S. CPI, then prices go down due to substitution quickly for a variety of reasons, while a constant basket of goods would show the obvious inflation.

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