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!
Thank you. I am not sure how helpful I am... simple investment strategies of just buying quality companies - and not worrying about bonds and currencies have really worked well for the last ten years.... and may well continue. So make sure you read widely... and if you see a great company with a great valuation - don't worry too much about the macro - and get involved!
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.
All true. My question is how does it make sense for a country with only 20% of US per capita GDP to have higher food prices? And if does make sense - what does it mean going forward. Japan was the biggest market for US pork for a long time, but that happened when Japan became rich....
Commodities don’t care about “what makes sense” in terms of relative GDP. They import pork, so they need to have a higher price to incent trade flows. From a demand perspective, pork is a much higher percent of their protein diet.
When the China herd is rebuilt, some of the “excess” demand will retreat, but I have a much harder time seeing cultural norms about food change en masse.
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
US is pretty transparent on pricing. China is the hard one to know exactly what is going on. I am sure food prices have gone up - but is it more expensive to buy food in China? I do know that in Japan in the 1990s it was way more expensive to eat that anywhere else. And now its pretty cheap. The tourist flow from China to Japan suggests that Japan is cheaper than China on some things... especially adjusted for quality
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!
Thank you. I am not sure how helpful I am... simple investment strategies of just buying quality companies - and not worrying about bonds and currencies have really worked well for the last ten years.... and may well continue. So make sure you read widely... and if you see a great company with a great valuation - don't worry too much about the macro - and get involved!
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
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.
All true. My question is how does it make sense for a country with only 20% of US per capita GDP to have higher food prices? And if does make sense - what does it mean going forward. Japan was the biggest market for US pork for a long time, but that happened when Japan became rich....
Commodities don’t care about “what makes sense” in terms of relative GDP. They import pork, so they need to have a higher price to incent trade flows. From a demand perspective, pork is a much higher percent of their protein diet.
When the China herd is rebuilt, some of the “excess” demand will retreat, but I have a much harder time seeing cultural norms about food change en masse.
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
🙌🙌🙌🙌
US is pretty transparent on pricing. China is the hard one to know exactly what is going on. I am sure food prices have gone up - but is it more expensive to buy food in China? I do know that in Japan in the 1990s it was way more expensive to eat that anywhere else. And now its pretty cheap. The tourist flow from China to Japan suggests that Japan is cheaper than China on some things... especially adjusted for quality