Food Inflation Coming?

Agricultural prices are a leading indicator for food prices and the UBS Bloomberg CMCI Agriculture Price index has been surging in the past few months. The following graph from the 5 Min. Forecast tells the story:

The implication from this graph is that, unless agricultural prices come back down to 2009 levels, food CPI could rise by 20 - 30%. Food, like energy, is an area where compression of margins is very limited: Raw material prices are largely passed through to the consumer.

The only hope depends on the fact that agricultural prices are very volatile. The index spike to 150 could very well be largely reversed within months. That would mute the CPI response to a significant degree.

The agriculture ETFs have tracked the UBS Bloomberg CMCI chart very well. In the following graph from Yahoo Finance the YTD results for PowerShares DB Agriculture ETF (DBA) in blue and iPath Dow Jones AIG-Agriculture ETN (JJA) in red are plotted.

click to enlarge

The bottoms for both ETFs and for the UBS Bloomberg CMCI Index all occurred in the same week in June. The moves that each made in 2010 are summarized in the following table:

The UBS Bloomberg CMCI Agricultural Price Index follows ten commodities. JJA holds futures contracts on seven of the commodities that are in the index. DBA holds contracts on five of the index commodities, but has significant positions in live cattle, feeder cattle and hogs that are not in the index. That accounts for the divergence of DBA performance from JJA and the UBS Bloomberg CMCI Agricultural Commodity Index. Curiously, though, the low point for all three did occur in the same week.

Disclosure: No positions.