BreadCan the global macro boys explain to me how wheat is up 60% for the year but i can get a loaf of bread or a box of Wheaties at the same price as 2006? Would seem the producers of food hedge their costs so as to control both the cost to consumer and their profits from the best recurring biz in the world — food.

But if they hedge then of course the must hedge at certain levels and if it keeps going they must keep hedging until the reflexive traders are satisfied and in the end it seems only the consumer gets the bill, so there must be inflation upon us as a result not only of the quants but also of the global macro reflexive crowd.

Jason Thompson replies:

First, I'd very much question the observation that you are paying the same price YoY. This is certainly not the case here in Chicago as Wheaties, along with Raisin Bran, Cheerios and Cornflakes are measured as part of a basket in a private inflation survey. They are up roughly 9% 3rd Quarter to 3rd Quarter and will experience price increases (already announced by manufacturers) of 10-12% to be seen within the next six months. It's very likely what you are missing is the reduction of discounts. By this I mean there are fewer promotions, coupons to the consumer, or rebates being offered to the grocery store. The price quoted on the rack may not have changed, but the average price paid by the consumer has increased.

I'm much more perplexed by your observations on bread, as that has seen the one of the largest increases in our basket of food, outside of milk and cheese, and some fruits and vegetables. Bread here in Chicago is up 18% YoY.

David Lamb extends:

WifeI've got to be luckiest husband on Daily Spec. My wife makes our bread and she orders hard wheat for $6-$7 per 25 lb. bag.  It takes 12-13 cups to produce five pounds of wheat flour, which is needed to make five loaves. We go through five loaves every week (she gives away half of it). Therefore, she spends $6-$7 per month on our breadstuffs (rolls, loaves of bread, etc).

Compared to store bought bread — well, there is no comparison, at least in taste. However, if we bought the same number of loaves at a store it would cost us, for the cheapest bread at WalMart, almost $2 a loaf. That would be $40 a month. Yes, I have seen an increase in wheat prices but the greatest wife in the world can handle it!

Riz Din replies:

The cheapest bread in the UK is less than 50p a loaf. Currently, £1 (or two UK cheap loaves) buys two dollars (or 1 US cheap loaf). Perhaps the international cheap bread arbitargeurs have helped to lower the USD/£.

Eli Zabethan explains:

Most food producers hedge out several years, but now there is little carryout as supplies are being used for alternative energy projects.

Kurt Specht replies: 

It's true that most food producers (and processors) hedge out several years, but the levels of hedging and the duration can vary widely by company and by item.  Several companies have cited various raw materials increases in their quarterly earnings reports this year as a cause of diminished earnings per share, but as the prices of commodities rise and more time passes, more and more of these companies will have to raise prices to keep up.



I was saddened by the death of Luciano Pavarotti, not only because he was the greatest tenor of the past 50 plus years, but because I was fortunate enough to see and hear him at his very best. What makes him the greatest is simple: none of the other tenors is/was capable of singing bel canto and Verdi's Otello. An amazing voice.

A recent broadcast of Rossini's William Tell reminded me of Pavarotti's superb recording. This really puts his greatness into perspective: How many tenors have recorded (or performed) this opera or the main, brutal tenor arias and Otello? To the best of my knowledge no one has done this between Pavarotti and Tamagno! And Tamagno was the first Otello.

Larry Williams adds:

These words are from the wife of one of Pavarotti's competitors and fellow singers, retired now, whose name is legendary in opera circles.  Many purists were not wild about Pavarotti — but here's as inside a look as you can get:

Luciano had a beautiful, clear voice, with an excellent technique, and a real connection to the Italian style. He did whatever he wanted. His control went beyond music and he understood his place and mission with no pretensions, unlike, say, Callas. I loved the individuality of his voice. You could never mistake him for anybody except himself.  I loved the ease with which he sang and the joy he took in performing.  He was an outsize personality that was able to spread the love of opera to many people, and for that the operatic world should be forever grateful. Operatic singers seem to be blander now, more cookie-cutter alike. I wonder if he would have made it in these times.

Eli Zabethan rues:

Despite having a parterre center box at the Met for many years, sadly I never got to hear the Maestro except on CDs. I was always traveling and missed his performances.



 I've got some friends down in the Miami/Homestead area of Florida that are great fisherman! We met a few years ago on the North American Hunting Club website. The NAHC has a website feature where you can do a "swap hunt". That's where you post a hunt in exchange for another hunt with someone else.

About five years ago, I posted on the site a "bow hunt for whitetail and turkey hunt in exchange for…?" I was open to offers. That's how I met the guys from Florida. We swapped a deep sea fishing trip for a hunt on my farm and had so much fun that we did it again. We no longer swap hunts or fishing trips; we just go hunting and fishing together whenever we can.

These guys are excellent fisherman. They all have regular jobs. One is paramedic, one owns an HVAC business, the other a roofing business, but they only do that on the side. They make their real money fishing. I was stunned when I found out how much these guys make fishing in tournaments. And they win or at least place in the money more often than not.

A few years ago we were out fishing in 10 - 12 foot rollers. I was as green with sea sickness but then we got into a mess of dolphin fish (sometimes called mahi mahi, or dorado's). We proceeded to catch more than 80 dolphin fish in four hours.

On the dock before we set out for the day, we were all talking about deer hunting. The conversation revolved around how each year there is some lucky guy who has never deer hunted in his life who goes out an shots a giant trophy buck. And since he doesn't know what he's got, he saws the antlers off and throws them in his garage until someone who knows deer hunting sees the rack and tells the ignorant hunter just what he has. The conversation revolved around how anyone could be so dumb as to not recognize what they've got after getting so lucky. What does this have to do with fishing (and maybe the markets)?

Eli Zabethan remarks:

I was out fishing Saturday, magnificent clear sunny day but winds were almost gale force and 5'-7' seas were boiling at 6pm. Even the Manaloking and Barnegat bays had 2'-3' waves. Not a place for amateurs when its gets this vicious.

Clive Burlin adds:

Yesterday at about 5pm the bay in front of my Jersey Shore house starting boiling. Hundreds of fish churning the water into chaos with the seagulls going ballistic at the same time. The blues were chasing the bunker. What an incredible sight! An absolute mad feeding frenzy. Within 30 minutes it was all over and the water was dead calm again. I'd never seen this before even though I've lived here for eight years. 



 One would think commodities would have an ever upward drift in price (everything gets more expensive, right?). Yet, a quick check of historical charts show they are boom and bust; there is no upward drift as in stocks. Why?

My take on it is very basic. The first law of the universe is to survive, the second is to grow. Corporations must grow to survive. All organisms are driven by that basic tenet, unfortunately even government agencies.

Corporations are growing, expanding organisms that morph to change and adapt in their inherent drive to survive.

Commodities are not such an organism… just a price. There is no drive or motivation for an ear of corn to sell at a higher price, to take over the world or gain market share. This also should serve as a warning to commodity long-only index or basket funds. Again, look at those long term charts!

Stocks drift higher because the way of man is to improve, grow, get better. Nothing has been able to stop that; not dictators, nor Communists or Socialists. Stock prices will always advance long-term as corporations are in the business of expanding and taking advantage of opportunities.

It does help the averages that dying stocks are removed (there are only a handful of stocks in the Dow that were also there 20 years ago) yet growth and value are always there to be discovered.

Go forth and prosper is the motto of all corporations.

Gregory van Kipnis writes:

Your observation is correct. I saw the same thing when I analyzed the data 25 years ago. The arguments made then were:

  1. stocks rise because the have growing earnings; commodities have no earnings
  2. ceteris paribus inflation is offset by storage and financing costs
  3. quantity supplied grows along with demand growth, more or less, not so for individual stocks
  4. commodities are substituted when one becomes relatively too expensive

The long term indexes are usually geometric means of broad baskets of agricultural and industrial commodities. Over time there are substitutions, e.g., kerosene for whale oil.

Eli Zabethan adds:

One must consider carry when looking at futures. There is a world of difference between the non carry considered charts and those where carry is considered…

Greg Rehmke offers:

Commodities as “natural” resources goes down in price over the long term (only one resource, labor, goes up in price). As Julian Simon explained, man is The Ultimate Resource, and all others we call natural now were once just rocks.

Black gunk bubbling up in salt marches became oil after whales became scarce and people started looking around for substitutes. The early oil in Pennsylvania ran out quickly, and only after Rockefeller’s army of chemists discovered how to get the sulfur out of similar black gunk in Ohio did it become oil too.

Discovering resources requires reason, freedom, and hard work. Without these rocks stay rocks, tar sands stay buried and useless, penicillin stays mold, DDT stays banned.

Over recent decades more and more world oil and mineral supplies left the free world and fell into government hands. I am reading about Zambia in Robert Guest’s book “The Shackled Continent.” Copper production in Zambia peaked in 1969 at 825,000 tonnes a year. Then it was nationalized and production has since fallen by two-thirds.

Oil resources, nearly all discovered by free people in private firms, have been grabbed by governments around the world. (Oil reserves in Russia, during few years of relative freedom between Soviet control and Putin control, went up dramatically.)

The economic freedom finally reaching hundreds of millions in China and India is lifting wealth creation and the demand for natural resources. How fast entrepreneurs, engineers, and enterprises respond to higher prices with new discoveries, technologies, production, substitutes, and efficiency gains, is anyone’s guess.

But looking back at the inflation-adjusted prices for natural resources over the decades and centuries shows a steady trend.

Of course, as commodities are priced in dollars, it is not clear whether the genius of private industry in extracting natural resources from the earth will match the “genius” of governments in extracting value from fiat currencies.



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