Crude oil is the most traded commodity in the world. However other than just supply and demand, a multitude of factors impact oil prices on a daily basis. Similar to the crude oil example, the prices of food are affected by a variety of complex factors. While in the past, food prices were determined just by the variables of supply and demand, today many factors come into play. The following graphic shows some of the factors and their impact on global food prices:

Source: Nomura Global Economics

One of the main factors that affect food prices is the price of oil. As the price of oil has shot up in recent months food prices have also followed suit. The following chart from a Journal article confirms this trend:

From the article:

The Food and Agriculture Organization price index rose by 2.2%—the eighth consecutive rise since June—to an average of 236 points last month, the highest record in real and nominal terms since the agency started monitoring prices in 1990.

Global cereal supplies are also expected to tighten sharply this year due low stock levels, the FAO said. The body raised its estimate for world cereal production in 2010 by eight million metric tons from its December estimate to 2.2 billion tons but said it expects that to be outpaced by an 18 million-ton increase in world consumption.

But while the world isn’t yet facing a food crisis, the secretary of the FAO’s Intergovernmental Group on Grains, Abdolreza Abbassian, said the recent rise in Brent oil prices to above $120 a barrel could create the same potent mix of factors that pushed grain prices to record highs three years ago.

Another factor affecting global food prices is the rise in speculation in food commodities. From a CFR 2009 article on food prices:

Source: CFR

Rising food prices may also affect the fragile economic recovery. As struggling consumers battle on two fronts – one with soaring fuel prices and the other with food costs – they may cut down on spending on other goods and services. A recent article in This is Money website of UK noted this point:

“Economists also fear that food price hikes will reduce economic activity and squeeze household spending as families desperately cut back elsewhere.

A UN report yesterday revealed that rises in bread, pasta, breakfast cereal, dairy and meat prices are on the horizon – irrespective of future oil price hikes.

The commodity price of key foods rose again in February, making it the eighth successive month of increases, according to the UN Food & Agriculture Organisation. It pointed out the export prices of wheat, corn and rice are up by a staggering 70% in one year.”

Overall if oil prices do not fall there is a serious risk for the global economy to enter into a recession again.

Soaring energy and food prices have low impact on Consumer Price Indices (CPI) in developed countries than in emerging countries. This is because unlike in the emerging markets, food and energy make up a lower share in the more service-oriented CPI baskets of developed countries. Emerging markets such as India, China, Brazil are experiencing high inflation rates now since energy and food prices have a higher allocation in their CPI calculations.

Source: US Treasuries and the Three Bears, CIBC World Markets

The following chart shows that many developed countries have the least exposure to food in their CPI calculations:

The emerging countries of India, Indonesia and Philippines are the top three countries with the highest exposure to food in their CPI baskets.

Source: Nomura Global Economics

Generally Canadians have a higher propensity to save compared to Americans in spite of having a better social safety-net such as free healthcare, pensions, job security, etc. under the socialist form of government. Up until the credit crisis hit most U.S. consumers saved very little. In fact, the personnel savings rate in the U.S. went negative a few years ago. As a consumer-driven economy Americans were bombarded with ads to spend their hard-earned money on all types of products and services that promised a rich-lifestyle and most obliged which kept the economy growing. However all that changed after the global financial crisis and the ensuing recession in which millions of jobs disappeared. As a result of the deleveraging process undertaken by American consumers, the savings rate has risen by over 3% in the past three years and the debt to income ration has decreased.

Canadians on the other hand have been saving less in recent years due in part to the soaring real estate prices. This “wealth effect” reduced savings and increased consumption. The Canadian savings rate averaged just 4.2% in the first three quarters of 2010. The American savings rate on the other hand is at near 6% which is 1.6% higher than the rate in Canada as shown in the graph below. This gap is the largest on record, according to a research report from CIBC World Markets.

Source: Back to Old-Fashioned Saving, Benjamin Tal, CIBC World Markets

The majority of the states in the U.S. are running deficits and hence are cutting government services when they are desperately needed by the middle and the lower classes in this sluggish economy. While the causes for the budget shortfalls are many, one of the main reason is that public workers at the state and local level are paid lavishly compared to their private sector peers. In addition to astronomical salaries, government workers get paid fat pensions when they retire, generous healthcare benefits during employment and after retirement,etc. The monthly pension amounts received by public workers are guaranteed regardless of the performance of equity/bond markets. In the private sector, most companies have eliminated defined pension plans in favor of 401-K and other contribution-type retirement plans.

Similar to the state and local public sector workers, Federal employees also receive above-market salaries and luxurious benefits. However despite being in deep debt like the states, the Federal government is able to “print” money of out thin air and pay such high packages to employees without any issues. States on the other hand have to depend on tax revenues in order to fund the massive labor costs. As tax revenues fall they find themselves in trouble and state workers who are used to the rich-benefits are unwilling to take any cuts.

Public workers are able to maintain the status quo because of the unions and their collective bargaining power. Unions fund politicians with millions of dollars in campaign contributions and then once in power politicians return the favor by agreeing to the demands of public workers and adding more burden on taxpayers. This is in sharp contrast to private sector workers where real wages have fallen for many years now and all the benefits due to productivity and technological advancements are reaped by a few at the top.

The following chart from a Journal article shows the rise of public sectors unions and the fall of private sector unions:

Source: The Wall Street Journal

From the article:

“We first started running the nearby chart on the trends in public and private union membership many years ago. It documents the great transformation in the American labor movement over the latter decades of the 20th century. A movement once led by workers in private trades and manufacturing evolved into one dominated by public workers at all levels of government but especially in the states and cities.

The trend is even starker if you go back a decade earlier. In 1960, 31.9% of the private work force belonged to a union, compared to only 10.8% of government workers. By 2010, the numbers had more than reversed, with 36.2% of public workers in unions but only 6.9% in the private economy.

The sharp rise in public union membership in the 1960s and 1970s coincides with the movement to give public unions collective bargaining rights.”

With official unemployment rate hovering over 9% and falling wages levels in the private sector, it is high time that politicians take on the powerful public unions and abolish their collective bargaining power. Productivity and efficiency in the public sector have to be increased and the benefits and wages of public workers must be brought down to be in-line with the current market conditions.

Related:

Union Contracts, Not Pay, Are States’ Problem