Today's Tidbits

Why Food Prices Have Been Rising
From the Los Angeles Times: “Nationally, food prices rose 3.9% in April compared with the same month in 2006, and the outlook is equally chilling wherever you shop. It is happening for many reasons: inflation, drought, freezing weather, even the rising cost of corn — highly sought after not only as ingredients for thousands of food products but also to make ethanol. Food prices in 2007 are increasing at their highest rate in years. "We are going to see grocery store prices show one of the most rapid increases in the last 15 years or so," said Patrick Jackman, an economist at the U.S. Bureau of Labor Statistics…Hard freezes in California, Florida and other southern states are one contributor to the rapid increase in prices, especially for produce, but that's easing as farmers plant new vegetable crops to replace what was damaged. The real problem, according to food manufacturers and supermarket executives, is the run up in fuel prices and the cost of grain, which has soared as an ever-growing amount of corn is diverted to make ethanol to mix with gasoline…The price of a bushel of corn has jumped 46% to $3.66 over the last 12 months and earlier this year topped $4…corn was the culprit for his estimate that food inflation will reach the 4% to 4.5% range this year, the highest since 1990. That's because corn is the building block for much of the American food supply. It is what dairy cows eat to make milk and hens consume to lay eggs. It fattens cattle, hogs and chickens before slaughter — depending on the animal it takes 2.5 pounds to 6 pounds of feed corn to produce a pound of meat. Corn syrup is the third-largest ingredient in Heinz ketchup and is the sweetener that goes into soda pop and hundreds of other food items. Corn also is the building block of the 7 billion gallons of ethanol made in the U.S. this year…Ethanol now gobbles 18% of the domestic corn supply, up from 10% in 2002…As farmers discover just how golden corn has become, they are replanting fields formerly devoted to wheat, soy and other foods with corn, driving up the price of even more food commodities. Soy is up 28% to $7.41 a bushel from May 2006… Meanwhile, smaller-than-expected crops in the U.S. and Australia have pushed the price of wheat up 22% to $4.80 a bushel from a year ago. That's why shoppers are paying more for bread and other baked goods. At the same time, food companies "are getting more aggressive" about raising prices to improve profit margins…Major manufacturers pushing through price increases include Coca Cola Co., Kraft Foods Inc. Kellogg Co., Hershey Co. and Tyson Foods Inc. Prices are going to continue to rise in coming months as companies such as Tyson, one of the nation's largest providers of beef, pork and chicken, pass what they are paying for corn down the food chain to consumers, said Richard Bond, the company's chief executive.”

Refinery Infrastructure Not Keeping Up With Rising Demand for Gasoline in U.S.
From USA Today: “Record gasoline prices have exposed the shortcomings of the aging U.S. refining system, but there are no quick fixes, a panel of energy experts told lawmakers Tuesday. That suggests gas prices will be vulnerable to refinery outages through the summer. And one expert said gas shortages are possible…"The U.S. petroleum industry's infrastructure is unable to cope with increasing demand," Guy Caruso, administrator of the government Energy Information Administration, told members of the Senate Energy and Natural Resources Committee. "The only pressure-relief valve is price."… Building refineries, factories that turn crude oil into gasoline, takes years and costs billions of dollars… oil companies were losing money as recently as 2002, providing a disincentive for investments. Plus, there's a shortage of energy workers, prices are high for raw materials for building, such as steel, and local opposition is often strong. The push for alternative fuels, such as ethanol, is leading firms to question whether gas demand will still be there by the time they get a refinery up and running…There were 149 U.S. operating refineries 2006, down from 216 in 1986. Companies have expanded existing refineries in that time and have found ways to increase the amount of gasoline they squeeze out of a barrel of oil, according to the American Petroleum Institute, the oil industry's trade group. But although gasoline production has risen, it is still falling short of demand, according to the EIA. The gap is filled by imports.”

Greenspan to Advise PIMCO
From The New York Times: “Alan Greenspan, the former Federal Reserve chairman whose pronouncements continue to jolt world markets, has signed a consulting deal with Pimco, the giant bond management firm. Mr. Greenspan, 81, will meet with executives of Pacific Investment Management Company once a quarter to discuss economic trends and has agreed to discuss Fed policy — but only behind closed doors, an associate with knowledge of the deal said. Mr. Greenspan will also hold periodic telephone and video conferences with senior executives, this person said. It is his first client since leaving the Fed…Until now, Mr. Greenspan has insisted that he would not talk about Fed policy or about the outlook for interest rates, because he did not want to appear to be second-guessing Mr. Bernanke. But his associate said last night that he would talk about those topics within the confines of Pimco, at least on occasion. “It would be a very small part of what he talks about,” the associate said. That could cause heartburn for Mr. Greenspan and Mr. Bernanke, because most of his recent comments about the economy have been behind closed doors, and have still made headlines.”

MISC

From Dow Jones: “…the 10-year note was unchanged…The dollar gained steadily… climbing to a two-and-a-half month high against the yen…U.S. stocks …making new highs…Crude oil futures stretched their losses…”

From UBS: “…[House building] permits were at their lowest since June 1997, and have fallen in ten out of the last twelve months [in April]…”
“Excluding autos, manufacturing output began Q2 up at a 3.7% rate, following a 1.5% pace in Q1 and -1.5% in Q4.”

From Merrill Lynch: “If we had told you six-years ago that the price of oil would triple, the CRB would nearly double, copper would surge six-fold, corn would jump over 100% and that the DXY would slide 25%, would you have predicted that by April 2007 the headline inflation rate (which includes food and energy, by the way) would be 2.6% year-over-year…Contrary to popular opinion, there is obviously still a strong disinflationary undertow in the retail arena where competitive pressures flourish, but pricing power flounders…”

From Dow Jones: “Merrill Lynch’s fund manager survey for May showed that investors are expecting that corporate profits will rise in May, although they also believe that inflation is likely to increase. The survey, which questioned a total of 201 investors managing $586 billion in funds, found that the net respondents expecting global corporate profits to rise was minus 12%, down from minus 32% in April. However, the net balance of investors expecting higher inflation rose to 34% in the month, from 27% in April, with a net 17% of respondents saying that global monetary policy is too stimulative, compared to 15% taking this view a month ago…Consequently, respondents expecting short-term interest rates to be higher in 12 months’ time rose to 29% from 12% a month ago.”

From The Financial Times: “The Euro zone’s robust economic growth rate slipped only modestly in the first three months of the year and still comfortably outpaced the US as the damaging impact of higher German VAT failed to live up to expectations.”