No we shouldn't, given residual stocks. But oil prices are up and that could hit inflation, says Clive Black
Food commodity markets are the 'flavour of the month' again among the speculative investor community. Wheat futures prices have rocketed in Chicago. Weather patterns in Canada and the eastern European steppes are now the subject of febrile conversation on trading floors while bakers', millers' and biscuit makers' worry lines grow.
Are we on the threshold of another spell of material food inflation or is this some form of speculative whirlwind?
Well, the answer to these two questions is probably 'yes' on both counts. The spike in wheat prices in particular is a reflection of genuine concerns on the commodity floors about the exporting capability of Russia in particular as a result of extreme summer heat wilting the crop (a temporary export ban has been imposed). Understandably, therefore, futures markets have responded with price mark-ups. However, one senses that those mark-ups have more to do with processes detached from cereal utilisation as opposed to trading, hence the involvement of the speculator.
What is different this time compared with the cereal price squeeze of 2007/8 is that global residual stock levels are much higher after two years of record crop output, while cereal production in other regions such as the US looks like it is going to be robust. Therefore there is a growing expectation on our behalf that UK milling wheat prices will be higher than we expected a few weeks ago, but we remain uncertain as to whether or not this will be structurally significant.
While this is so, other upward price pressures lead us to expect food inflation to be pencilled up in H2. Brent crude prices are now above our reasonably long-standing $65-$80/barrel range while fresh food prices (fruit, vegetables and meat) have risen over the past couple of months.
Accordingly, our 1% to 2% H2 UK food inflation expectation may need to be marked up, maybe to 2% to 4%. Such an outcome would be welcome for food retailers but a cause of some concern for the supply chain until necessary cost recovery is achieved.
More broadly, how would rising food prices sit with the quiet and cautious consumer? We are not of the view that a new bout of trading down is about to commence in the UK but Mr Osborne's austerity needs to be played out and understood. So, challenges remain ahead for all in the industry.
Clive Black is head of research at Shore Capital.
Food commodity markets are the 'flavour of the month' again among the speculative investor community. Wheat futures prices have rocketed in Chicago. Weather patterns in Canada and the eastern European steppes are now the subject of febrile conversation on trading floors while bakers', millers' and biscuit makers' worry lines grow.
Are we on the threshold of another spell of material food inflation or is this some form of speculative whirlwind?
Well, the answer to these two questions is probably 'yes' on both counts. The spike in wheat prices in particular is a reflection of genuine concerns on the commodity floors about the exporting capability of Russia in particular as a result of extreme summer heat wilting the crop (a temporary export ban has been imposed). Understandably, therefore, futures markets have responded with price mark-ups. However, one senses that those mark-ups have more to do with processes detached from cereal utilisation as opposed to trading, hence the involvement of the speculator.
What is different this time compared with the cereal price squeeze of 2007/8 is that global residual stock levels are much higher after two years of record crop output, while cereal production in other regions such as the US looks like it is going to be robust. Therefore there is a growing expectation on our behalf that UK milling wheat prices will be higher than we expected a few weeks ago, but we remain uncertain as to whether or not this will be structurally significant.
While this is so, other upward price pressures lead us to expect food inflation to be pencilled up in H2. Brent crude prices are now above our reasonably long-standing $65-$80/barrel range while fresh food prices (fruit, vegetables and meat) have risen over the past couple of months.
Accordingly, our 1% to 2% H2 UK food inflation expectation may need to be marked up, maybe to 2% to 4%. Such an outcome would be welcome for food retailers but a cause of some concern for the supply chain until necessary cost recovery is achieved.
More broadly, how would rising food prices sit with the quiet and cautious consumer? We are not of the view that a new bout of trading down is about to commence in the UK but Mr Osborne's austerity needs to be played out and understood. So, challenges remain ahead for all in the industry.
Clive Black is head of research at Shore Capital.
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