Food Prices Surge as Drought Exacts a High Toll on Crops Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

Federal forecasters estimate retail food prices will rise as much as 3.5% this year, the biggest annual increase in three years, as drought in parts of the U.S. and other producing regions drives up prices for many agricultural goods. (…)

In the U.S., much of the rise in the food cost comes from higher meat and dairy prices, due in part to tight cattle supplies after years of drought in states such as Texas and California and rising milk demand from fast-growing Asian countries. But prices also are higher for fruits, vegetables, sugar and beverages, according to government data. In futures markets, coffee prices have soared so far this year more than 70%, hogs are up 42% on disease concerns and cocoa has climbed 12% on rising demand, particularly from emerging markets. (…)

Inflation also could be tempered if U.S. farmers, as expected, plant large corn and soybean crops this spring and receive favorable weather during the summer. That would hold down feed prices for livestock and poultry, as well as ingredient costs for breakfast cereals and baked goods.

The U.S. Department of Agriculture estimated last month that retail food prices will rise between 2.5% and 3.5% this year, up from 1.4% last year. The inflation comes despite sharp decreases over the past year in the prices of grains, including corn, after a big U.S. harvest. In other years—notably 2008—surging grain prices were a key contributor to higher food costs. (…)

One reason prices are higher now is the lingering effect from the historic 2012 U.S. drought, which sent animal-feed prices surging to record highs and caused livestock and dairy farmers to cull herds, analysts said.

In California, the biggest U.S. producer of agricultural products, about 95% of the state is suffering from drought conditions, according to data from the U.S. Drought Monitor. This has led to water shortages that are hampering crop and livestock production.

U.S. fresh-vegetable prices that jumped 4.7% last year are forecast to rise as much as 3% this year, while fruit that gained 2% last year will rise up to 3.5% in 2014, according to the USDA.

Dry weather in Brazil has contributed to a dramatic increase this year in prices for arabica coffee, the world’s most widely produced variety. Arabica-coffee futures, which were at a seven-year low last year, settled at a two-year high of $2.0505 a pound on March 13.

In each of the past two years, global food prices on average declined from the previous year, as farmers ramped up production of wheat, sugar and other commodities, according to the United Nations Food and Agriculture Organization, which publishes a monthly food-price index. But that index rose 5.2 points to 208.1 last month compared with January, the sharpest jump since mid-2012.

Food-price increases are a particularly touchy issue for emerging markets, where spending on food accounts for a higher share of monthly budgets than in wealthier countries. (…)

In last week’s post on rising food prices, I also warned of the coming El Niño which we last saw in 2009:

Commodities investors and farmers are on alert after the third official warning in a week of an El Niño weather phenomenon emerging that could affect food and energy markets already reeling from extreme weather in many parts of the world.

U.S. inflation muted despite food price increases

The Labor Department said its Consumer Price Index nudged up 0.1 percent as a decline in gasoline prices offset an increase in the cost of food. It had ticked up 0.1 percent in January and last month’s gain was in line with economists’ expectations.

In the 12 months through February, consumer prices increased 1.1 percent, slowing from a 1.6 percent rise in January. The February increase was the smallest rise since October last year.

Last month, food prices rose 0.4 percent, the largest increase since September 2011. That accounted for more than half of the increase in the CPI last month.

Stripping out the volatile energy and food components, the so-called core CPI also rose 0.1 percent for a third straight month. In the 12 months through February, core CPI rose 1.6 percent after advancing by the same margin in January.

Has Food Stamp Enrollment Finally Peaked? After years of increases that defied the roaring stock market of 2013 and the slowly falling unemployment rate, the number of Americans receiving food stamps appears to be easing. Somewhat. Very, very slowly.

The U.S. Department of Agriculture, which administers the Supplemental Nutrition Assistance Program, reported that 46.8 million Americans received SNAP benefits in December. That is a lot of people, but it’s also the lowest number of Americans to receive benefits since June 2012. The December 2013 figure was down 1 million people from December 2012.

The USDA also reported that 22.8 million households received SNAP benefits in December, which is the lowest number since August 2012. And the $5.8 billion in SNAP benefits that was paid out in December was the lowest number since November 2010.

SNAP data can bounce around, and it’s unclear whether the number of people receiving benefits will continue to fall. The December figures don’t take into account changes that were made in February when Congress passed a farm bill that included new limits on who can receive food stamps. Also, as more and more Americans return to work and earn more money, the number of people receiving these benefits is expected to fall, though many thought total enrollment would fall more quickly than it has.

U.S. Factories Rev Up

Industrial production increased a seasonally adjusted 0.6% in February from the prior month, the Federal Reserve said Monday. Capacity utilization, a gauge of slack across industries, was up 0.3 percentage point to a 78.8% rate.

In one positive sign, manufacturing output—the largest component of industrial production—jumped 0.8% in February. That was the biggest gain since August and nearly retraced a 0.9% January drop. (…)

Manufacturing output had tumbled 0.9% in January. “Much of the swing in the rates of change for production in January and February reflected the depressing effects on output of the severe weather in January and the subsequent return to more normal levels of production in February,” the Fed said. (…) (Chart from Haver Analytics)

I thought severe weather hit much of February.

February ended with its coldest final week since 2003, according to Berwyn, Pennsylvania-based weather data provider Planaytics Inc., The second week of the month was the snowiest such period since 2007.

It will all be clearer in April .

And while the weather effect may be fading, manufacturers still have to cope with inventory backlogs. Factory stockpiles rose steadily last year as production outstripped demand. Inventories of durable goods—products designed to last at least three years—hit a record level in January. When too many goods pile up on shelves, companies typically slow output.

New York manufacturers said business conditions improved this month, although new demand remains sluggish, according to the Federal Reserve Bank of New York’s Empire State Manufacturing Survey released Monday. The Empire State’s business conditions index increased to 5.61 in March after it fell to 4.48 in February from 12.51 in January, which had been the highest reading since May 2012.

FINAL WEATHER SCORES

Assuming there are no revisions (), here’s the final tally via Mother Jones:

This winter has been a tale of two Americas: The Midwest is just beginning to thaw out from a battery of epic cold snaps, while Californians might feel that they pretty much skipped winter altogether. In fact, new NOAA data reveal that California’s winter (December through February) was the warmest in the 119-year record, 4.4 degrees Fahrenheit above the 20th century average.

U.S. Home Builders Remain Cautious U.S. home builders remained cautious about the housing market in March, suggesting a driver of the recovery might be sputtering for reasons beyond the severe winter weather.

Builder confidence in the market for single-family homes rose just one point from a month earlier to a seasonally adjusted 47 in March, the National Association of Home Builders said Monday. Readings below 50 indicate more builders view conditions as poor than good.

The increase, which was smaller than expected, comes after a drop of 10 points in February, the biggest one-month decline on record. Builders reported they were slowed by poor weather, but also said they were also hampered by difficulties finding labor and land. (…)

Monday’s report showed sales and traffic increased slightly in March, but sales expectations over the next six months declined. (Chart from Haver Analytics)

  

 Housing Starts in U.S. Little Changed From Stronger January

The 0.2 percent decrease to 907,000 homes at an annualized rate last month followed a revised 909,000 pace in January, figures from the Commerce Department in Washington showed today. The median estimate in a Bloomberg survey called for a 910,000 rate after a previously reported 880,000 in January.

Permits filed for future projects increased 7.7 percent to a 1.02 million pace in February, the most since October and reflecting a surge in applications for apartment-building construction. One-family home-building permits dropped for a third straight month to the lowest level in a year. (Chart from CalculatedRisk)

CONTAINER IMPORTS DECLINE FOR SECOND STRAIGHT MONTH

U.S. ocean container export volumes fell 4.7 percent from January, following two months of modest increases. Exports to China, one of our largest trading partners, have fallen for the last two months. Recently the Chinese economy has slowed, with factories closing and wages falling. Exports to many of our other major trading partners decreased in February as well. This was the worst February for container exports in the last five years. Compared to February 2013, exports were down 16.8 percent. (Cass)

Must be the weather, somewhere…

EU Auto Demand Revs Up

New car registrations, which closely track actual sales, rose 8% in February from the same month a year earlier to 861,058 vehicles, the European Association of Automobile Manufacturers, known as ACEA, said. Car sales in February rose for the sixth consecutive month after six years of falling demand. Car sales in January and February combined were up 6.6%.

Car sales fell 1.4% in France last month, while sales in Germany, the EU’s biggest car market, rose 4.3% and are up 5.7% so far this year. Car sales rose 3% in the United Kingdom and were up 8.6% in Italy and 17.8% in Spain.

German Court Clears Bailout Fund Germany’s highest court ruled that the euro zone’s permanent bailout mechanism is in line with the country’s constitution, confirming a ruling that had been crucial to put an anticrisis firewall in place.

Russian Sanctions vs. Russian Debt Exposure

(…) Russia clearly does not have a public foreign debt problem, but it does have a private foreign debt problem. Its corporates have issued FX-denominated bonds now worth 10% of its GDP (see the chart “Russian External Bonds”). That issuance has grown further and faster than for emerging markets as a whole, as well as commodity-exporting EM economies which tend to be the perennial bad boys of debt.

Who owns this foreign debt? Bonds are bearer instruments so we don’t know. But we do know something about bank exposure to Russia, and it is European banks that are exposed to the lion’s share of the problem. European banks’ exposure to Russia totals $272bn, which is about a fifth of their exposure to the GIIPS economies. In and of itself, that doesn’t sound like the makings of a crisis, but it is clearly an additional deleveraging headwind that will buffet a banking sector that has barely recovered from its 2011-12 “near-death” experience.

The circumstances under which this exposure could turn into a crisis are where a weakening ruble makes the foreign debt burden difficult for Russian banks and non-financial corporations to service, especially at a time when weakening domestic growth threatens their earnings momentum. Those circumstances are neither distant nor unlikely.

CHINA

China FDI data indicates sharp slowdown in February  China drew $19.3 billion in foreign direct investment (FDI) in the first two months of 2014, up 10.4 percent from a year earlier, the Commerce Ministry said on Tuesday, indicating a sharp slowdown in February due to the Lunar New Year holidays.

China drew $19.3 billion in foreign direct investment (FDI) in the first two months of 2014, up 10.4 percent from a year earlier, the Commerce Ministry said on Tuesday, indicating a sharp slowdown in February due to the Lunar New Year holidays.

Chinese Companies Caught in Yuan Riptide China’s decision to squeeze speculators out of its currency is causing pain for local companies and individual investors.

(…) paper losses on one popular way companies hedge their yuan exposure and individual investors bet on the yuan, through what is known as target redemption-forward products, have hit $2.3 billion, on contracts valued at $150 billion. (…)

For now, most of the losses remain on paper because investors and companies haven’t yet sold their positions. However, banks are asking both corporate and individual clients with losing bets to pony up more collateral, traders in Hong Kong say. Banks also are advising companies to restructure their investments around weaker levels for the yuan, a cheaper alternative than completely unwinding millions of dollars of the products, which were originally designed to help companies hedge against gains in the yuan.

While the recent declines likely aren’t big enough to trigger a stampede out of the yuan, the added volatility in the exchange rate may give some investors pause. (…)

CHINA’S REAL ESTATE CRISIS

This potential risk is now widely known (WATSA ON CHINA). Stratfor just wrote a piece on China housing (Tks Maurice). Some excerpts from A Difficult Year Looms for China’s Real Estate Market:

(…) At the moment, the price cuts are confined to a few complexes and areas associated with specific developers. Nevertheless, falling prices have given way to growing pressure to sell in local property markets across the country, posing a serious threat to the stability of the national real estate market and the economy as a whole. (…)

There is massive oversupply and rampant speculation, and local governments are highly dependent on property-related revenues. (…)

The real estate market has become the linchpin of economic growth and local government financing. The real estate sector boomed behind fast-paced urbanization and skyrocketing demand from the rising middle class, but equally important was the political incentive to offer unrestrained credit in order to turn the market into a driver of economic development. Now that Beijing is focused on the structural problems of the country’s economy and its impending slowdown, the government is no longer able to keep prices high. (…)

According to official estimates, property loans by 2013 accounted for about 38 percent of total loans, compared to about 28 percent in 2007. This included 13 percent from mortgages for individuals (down from about 20 percent in 2007), 10 percent for real estate developers and approximately 15 percent for local government financing vehicles (entities created by local governments to raise money for mostly infrastructure and property development projects). In 2014, approximately 2.39 trillion yuan in local debt will mature, most of which is highly dependent on land transfer fees and thus land and property prices for financing and repayment. Cities and provinces that have a high dependence on real estate finances and with declining local economies will be exposed to higher risk, including
Zhejiang, Fujian and Sichuan. Additionally, real estate is the primary source of collateral for about three-fourths of bank loans for many sectors, including manufacturing, steel and shipbuilding. A downturn in real estate prices could undermine the banks’ ability to recover loans for many of these already strained sectors.

Bank exposure to the real estate sector is increasingly off the books – in the form of wealth management products, which have become central features of China’s “shadow” lending sector in recent years, or trust funds — since the credit line was tightened in 2011. In 2014 alone, approximately 4 trillion to 4.5 trillion yuan in high-rate trust funds will mature, about 633.5 billion yuan of which is tied to real estate. Sporadic defaults in small and regional banks associated with industries such as
coal and steel have already occurred. A sharp decline in property prices would add significantly to the risk of bank defaults.

Beijing still has a handful of policy tools to prevent the real estate crisis from spreading nationwide, including loosening restrictive policies on developers and individuals or adding liquidity to the market as it did during the 2008-09 financial crisis. But the central government is also under pressure to refrain from generating greater systemic risk and putting into question its ability to maintain economic and financial stability. With local industries such as coal and manufacturing slowing and an inevitable correction of state-driven investment, a wider adjustment of the local real estate market is unavoidable — and perhaps even necessary in the short
term. The risk of contagion will inevitably grow and could turn the once-booming sector into a liability.

Right on cue, this morning:

China Property Developer Can’t Repay Loans Zhejiang Xingrun’s Default Is Unusually Large for Developer in Affluent Region of Country

Government officials rushed to deal with the collapse of a property developer unable to repay almost $600 million of loans in a large default for a real-estate firm and the latest sign of stress in a slowing Chinese economy.

Officials in the eastern city of Fenghua have been meeting in recent days to determine how to deal with Zhejiang Xingrun Real Estate Co.’s outstanding debt and dispose of its remaining land assets, according to a person in the city’s financial affairs office, who declined to give her name. The company owes banks 2.4 billion yuan ($390 million) and a further 1.1 billion yuan to other creditors, according to a statement on the local government’s website.

Zhejiang Xingrun’s chairman, Shen Caixing, and his son, Shen Mingchong, have been detained by local police after being charged with illegal fundraising, the government statement said. The charge is a broadly defined economic crime often leveled against private businesspeople when their companies collapse. (…)

Earlier this month, solar components maker Shanghai Chaori Solar Energy Science & Technology Co. became the first Chinese company to default on a domestically issued bond. A number of trust companies have signaled that their borrowers are unlikely to be able to repay their debts. (…)

Government records show that at the beginning of 2010, Zhejiang Xingrun paid 660 million yuan, or 4,700 yuan per square meter for what at the time was the largest piece of land the local government had sold in two years. At the end of 2013, the local government sold three adjoining lots for about 3,500 yuan per square meter, undercutting the value of the land the company was using as collateral. (…)

SMALL IS BEAUTIFUL? Hmmm…

Small caps continue to outperform large caps. Citigroup analysts try to explain (via ValueWalk):

(…) there is a view that the more domestic focus of smaller cap Russell 2000 stocks may be part of the reason given unanticipated international developments for the relative strength. Moreover, new growth concerns in China and other emerging economies likely have affected more of the bigger multinational entities than their smaller counterparts, yet many indicators suggest a swap back toward large caps make eminent investment sense. 

Small cap valuations are getting more and more stretched, defying nearly 40 years of history:

Citi’s analysts have done the leg work for us:

When reviewing 360 (!) economic indicators and finding the 10 most highly correlated to subsequent 12-month stock price trends, it is signaling that a large cap bias is appropriate. Notably, the spread between junk bond and 10-year Treasury yields are near historical lows and there has been a relative price performance relationship tied to that spread as well. Accordingly, it seems wise to take on the large cap relative trade at this juncture.It’s amazing the relationships one can find when one digs through 360 indicators: how the capacity utilization of electric and gas utes can help understand the Russell 200/S&P 500 relationship is well beyond me but what else is new? On the other hand, Citi’s model on that same relationship has been pretty good.

Figure 3 highlights the lead indicator model that we have constructed by reviewing the correlations of 360 economic series and subsequent relative stock price performance of large and small cap indices and finding the 10 most correlated factors. While we do not disclose all of the factors in this proprietary approach, Figure 4 does address one to give investors some glimpse of underlying data sources and its unique R-squared relationship. Accordingly the data argues for smaller cap relative caution.

TheTradersWire.com is also alarmed by the apparent froth in small caps:

(…) Another sign of disproportionate risk in small-caps is so many of the past year’s leaders in the Russell have no earnings.

Shockingly, among the index’s top 10 performers during the past 12 months, only the beleaguered retail pharmacy chain Rite Aid (NYSE: RAD) has positive earnings. The rest are losing money.

This suggests investors who favor small stocks are resorting to heavy speculation in their pursuit of attractive returns because so few good values are left in the smaller-cap space. (In fact, only about 10% of Russell 2000 stocks currently trade for 10 times earnings or less.) And based on the names in the Russell top 10, the speculation involves the riskiest types of stocks — biotechnology, alternative energy, and technology companies that have rarely, if ever, turned a profit. (…)

One-Fifth of U.S. Teens Say Designated Driver OK to Drink

About one in five adolescents say it’s fine for their driver to have some alcohol or use drugs, as long as that person isn’t too impaired to drive. Four percent just pick the least inebriated person to take them home, Liberty Mutual Holding Co. and a safety group found in a survey released today. (…)

A separate study of bar patrons last year found that about 40 percent of designated drivers consumed some booze.