Where is the love? Wait, correct me if I am wrong here. Who is it that actually controls the price of goods? Come on, I know you want to answer: the Fed, because, after all, this is a financial market note. When I was at Whole Foods the other day, I watched one of the friendly butchers roll out a cart full of chicken and load up the shelf after he had carefully applied the price stickers behind the case. I am pretty sure that the butcher was not a member of the Federal Open Market Committee who just voted to raise the Fed Funds rate by +75 basis points on Wednesday. I am also pretty sure that whatever prices were on those packages of chicken have very little to do with an overnight, interbank lending rate.
Somewhere in some sunny rural area far from my New York suburb is a poultry farm. Flocks of chickens run about big pens pecking on chicken feed. Chicken feed is primarily made from corn. Yes, corn, whose price has risen by some +105% since the start of 2020. There are many reasons for the unprecedented gain. Weather and crop yields have a hand in it, but those types of conditions are routinely dealt with by farmers. Fertilizer prices have skyrocketed in the past few years as potash, a primary ingredient rose by +187% since the start of 2020. Labor costs are higher as well. Then there is fuel cost. Diesel fuel for farm equipment and transportation vehicles…I know that you are well aware, but I am just going to tell you anyway to amplify my assertion. Diesel fuel prices are now +214% higher than at the start of 2020. Because of all this, chicken feed is now more costly, and that is just the start. Those chickens must get processed before they are sent to my local Whole Foods. Labor shortages, particularly in meat processing plants, have wrought havoc on producers, driving up labor costs. Then there are some more transportation vehicles. Diesel fuel, again. Whole Foods, a for-profit, wholly owned subsidiary of Amazon.com is now paying more for chicken. It marks up the price to maintain its healthy profit margins. Hold on, before you level your angst at your local grocer, it is important to know that margins are actually very slim on food products. So, Whole Foods has very little room to ease the pain to its customers.
Back in my New York suburb many families are sharpening their pencils and looking closely at their monthly budgets. With inflation at 40-year highs, just about everything costs more this year than last. Commuting costs are higher, food is more expensive…even haircuts cost more. Some of those families have adjustable mortgages, some use credit cards, and some may be considering purchasing a new car. Higher interest rates mean that those families will have even less to spend on their monthly essentials. That may ultimately cause consumers to cut back demand for groceries. In our example, some may be forced to buy less chicken and settle for a cheaper alternative. Lower demand for chicken will cause Whole Foods to order less from its vendors. Poultry farmers will have to ultimately cut down on their production, which means less demand for chicken feed, corn, soybeans, and ultimately, fertilizer. Potash producers will be forced to lower prices. Lower demand for diesel fuel will also push fuel costs lower. Demand for labor will ease up as farms and processors cut back, so labor costs will go down. At some point, the entire supply chain will respond to lower demand at Whole Foods, ultimately leveling off the rising price of chicken, which is currently some +25% higher than at the start of 2020, its highest price since 2000.
As you can see, there are many factors that go into your rising grocery bills. Demand can be throttled back by raising interest rates, but those rising rates will have very little impact on commodity prices and supply. Worse yet, the war in Ukraine has had a major impact on the price of grains, fuel, and…potash. Ukraine is the 5th largest global corn producer. Russia accounts for around 20% of global potash. I am sure that I don’t have to remind you that Russia is the second largest oil producer in the world. To be clear, commodity prices were already on the climb prior to the Ukraine conflict due to increased demand from the recovery, but those gains were only exacerbated by the supply challenges that emerged because of the invasion. Wall Street’s eyes are very much on the Fed these days, but as you can see, those eyes should be on eastern Europe, the corn belt, and of course, their wallets.
YESTERDAY’S MARKETS
Stocks dropped yesterday after inflation and recession fears overtook traders in the wake of Wednesday’s Fed rate hike. The S&P500 fell by -3.25%, the Dow Jones Industrial Average declined by -2.42%, the Nasdaq Composite Index dropped by -4.08%, and the Russell 2000 Index sold off by -4.70%. Bonds gained and 10-year Treasury Note yields fell by -9 basis points to 3.19%. Cryptos were lower by -5.46% and Bitcoin lost -4.45%.
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