Kiss the current cost of Hershey’s Kisses goodbye!

Stocks rallied yesterday as investors were optimistic about a Fed pause. AI continued to dominate the psyche of traders who continued to drive tech shares higher.

It’s a BOY! We have talked a lot about inflation over the past few years. I am sure, you, like me, are not only tired of talking about inflation, but are also tired of overpaying for just about everything. I really experience inflation up close as I do the grocery shopping for the family, EVERY DAY. So, I feel that I have a good handle on what’s what in the world of food inflation, though my mother-in-law remains the recognized expert in the field. In fact, just last night I was lamenting to my wife about how much I paid for a package of chicken thighs… chicken thighs! It’s not just meat, it is everything I buy, and it is not just Whole Foods, my typical pre-dinner haunt. I tried another UNNAMED grocery store last night for some variety, and the same already overpriced organic chicken cost even more.

Food inflation has been a big driver of overall inflation over these past few years. Food inflation peaked last August at +11.6% and has since declined to +7.7% (reported last month). That seems like a win until you realize that pre-pandemic, food inflation was almost perpetually under +2%. It does, indeed fluctuate, but it is not typically affected by the same drivers as general goods inflation. Excited consumers can drive prices of TVs, cell phones, cars, clothing, wash machines, etc… you know want-to-haves. But food is generally a got-to-have… you know, to survive. Food prices are typically driven by commodity prices. Things like wheat, corn, rice, and soybeans. Those types of crops are affected by weather patterns. Higher crop yields in favorable weather conditions mean lower prices for bread, and vice versa. Corn and Soy, also affected by weather, can have impacts on other types of food, such as proteins. They are used for livestock feed and when feed goes up in cost, so does the price of the protein we buy. AHA, that must be why I spent $11 for 4 chicken thighs last night! Mostly, but it goes beyond that. Bird flu has affected poultry supply, and not just the birds themselves. I won’t talk about egg inflation, because I am sure you know. So, a good portion of food inflation comes from simply… nature behaving badly, which is… normal. But there is more. Throw in a war in Eastern Europe which produces a good portion of the world’s wheat, potash for fertilizer, and petroleum (yes petroleum is used in fertilizer), and you get double… er, triple trouble. What could break this pattern?

There are obviously many factors that go into food price, and I have overly simplified things for the purpose of this discussion. That takeaway is that weather is a big factor in determining lots of the scary prices at your local grocery store. That may be about to change. A big weather gender reveal is underway, and it may not be Instagram worthy, but it will affect the world over. Have you figured it out yet? I am talking about El Niño! That is right, HE is coming to town and his sister La Niña is on her way out. I am no weather expert, so I won’t even try to explain how it all works, but El Niño means that in some places of the world climate conditions will get warmer and drier, while in others, they will get cooler and wetter… and all combinations therein. It can possibly cause rice yields to go down in Asia, which will cause global prices of rice to go higher. Wetter weather in California may lead to better avocado crops, causing avocado prices to ease. El Niño conditions in the American mid-west are favorable for corn yields and prices, which will be welcomed by all (and made quite obvious by the chart below). Maybe, just maybe, with livestock feed prices easing, I will be able to pay less for a package of chicken thighs… if mother nature cooperates. But it is important to note, that there are indeed many negative effects. Notable is the price of cocoa, which is expected to continue to rise in the changing weather pattern. In this house, at least, cocoa’s most famous end-product, chocolate, is a got-to-have in this household .

YESTERDAY’S MARKETS

Stocks gained yesterday as investors were optimistic about a Fed skip and today’s hopefully muted inflation figure. The S&P500 climbed by +0.93%, the Dow Jones Industrial Average rose by +0.56%, the Nasdaq Composite Index jumped by +1.53%, and the Russell 2000 Index advanced by +0.40%. Bonds gained and 10-year Treasury Note yields were unchanged at 3.73%. Cryptos lost -5.89% and Bitcoin slipped by -0.92%. The S&P500 ESG Index added +1.76%.

NEXT UP

• Consumer Price Index / CPI (May) may have eased to +4.1% from +4.9%. The monthly gain is expected to be +0.1%, down from +0.4%.
• Small Business Optimism (May) reported a rise to 89.4 from 89.0, beating estimates.
• The Treasury will sell $100 billion in bonds and bills today keeping the supply pressure on.