Wholesale prices surged 1.1% in September, led by rising energy and food prices,
according to the BLS. Core inflation rose 0.1%. Economists expected the Producer Price Index (PPI) to rise 0.4% and the core to rise 0.2%, so it’s something of a wash, right? Hardly!
First of all, core PPI is useless. It excludes food and energy, the most inflationary forces at work in the global marketplace right now.
Secondly, the 1.1% increase in wholesale prices was the largest increase since February. Leading the was energy, up a huge 4.1% in September. And that was the biggest increase since last November. It was also a huge swing from the 6.6% drop in August.
Food prices are also heating up – up 1.5%. Compare that to a drop in food prices of 0.2% in August.
The fact is, fundamental forces are lining up that should drive both food and energy much higher.
For energy, some of those forces include …
* Net crude oil imports for China -- which is already the world’s second largest oil importer -- totaled 108 million tonnes for the first eight months of 2007, according to China’s General Administration of Customs (GAC).
That’s up a stunning 18.1% compared to the same period last year and sends a clear message that China’s energy demand continues to explode higher. Bullish for oil and energy-related shares? No doubt about it.
* Stockpiles are dangerously thin. Inventory started to drop in October of 2006, due to a lack of more pumping by OPEC, a lack of new supply from non-OPEC producers, and rising extraction costs that make every barrel of oil more expensive than the last .
* $100 a barrel oil could hit the market by 2008 -- just a few months away, according to the latest report from investment bank CIBC World Markets
For food, some of the things to watch going forward include …
* Global grain supplies hit their lowest level in 26 years! Worldwide, grain production fell short of production in 8 of the last 9 years. This has lowered grain supplies to the lowest level in 26 years, and they continue to fall, and should drop to 114.8 million tons by May 31, 2008. That would be only 67.5 days of supply -- the tightest in modern history. And it’s only going to get worse – global grain demand is growing by 31 million tons per year.
* Demand for grains isn’t slowing down ... it’s rising by 31 million tons a year!
* Demand for ethanol is through the roof, driving up the price of corn, sugar cane, and related products.
* China’s hunger for grain and meats is soaring. China’s grain demand is rising above its output. It fell short by 10 million tonnes last year, and despite bumper crops, the problem should get worse going forward. Arable land is shrinking in China – dwindling by 8 million hectares between 1999 and 2005 – and China’s use of corn-based ethanol is pressing on tight supplies.
* Crops are being hurt by both droughts and floods. Droughts in Europe will lower harvests in Germany and France by 10% and a drought in Canada means the smallest wheat crop in five years … in Australia, lack of rain is dropping the wheat harvest by 29% … and in the Ukraine, the world’s seventh-largest wheat producer, drought is turning 58% of its exports to dust. Meanwhile both droughts and floods have hammered China and cut its wheat output by a tenth. Hurricane Dean trampled Mexico’s corn harvest. In the US, we may be having the largest corn crop ever, but our customers are lining up around the globe to buy it. And rising energy prices should support corn prices too, as more corn is turned into ethanol.
* Global Warming is making things worse. A recent study shows that global temperatures increased enough between 1981 and 2002 to reduce major grain crop yields by an annual average of 40 million metric tons.
Add it all up and we should see continued upward pressure on prices. If the Fed continues to cut, that is going to open the door wide for inflation. Investors should buy gold and silver, and select miners that are leveraged to the metal, to hedge!
Update: The good news is the storm has passed by. The bad news is that huge waves are pounding our coast, eroding the hell out of the waterfront.
