Party Point – January 2012

John Clark writes…

First published: January 2012 – Gazette & Herald

We were told: ‘No more boom and bust’; ‘the city and bank dealings were good for Britain’. We are told that ‘the rise in cost of raw food materials is one of the main causes of the present level of inflation’. I didn’t believe them then and I don’t believe them now.

Stockmarket fluctuations and swings in the euro crisis all claim to be related to facts. These changes are driven by emotions, panics, rumours and what others are doing. In the food commodities world there is a similar pretence – record maize crops in South America, drought in Australia, storms in the Ukraine. It is hard to believe that the price fluctuations are caused by these ‘facts’. The price of wheat increased by nearly 50% in just 3 weeks in early 2008. It then reverted to the original figure by May. These changes could not be based on production costs, climate or natural disasters. They were too dramatic and volatile to be driven by supply and demand. Jack Watts of the Home Grown Cereals Authority (HGCA) gives the game away “At the end of 2011 sentiment towards commodities was depressed because of the euro crisis…….” They were driven by pure speculation and gambling.

A second question is ‘What is the real impact of the price increase of food commodities?’ In the 1970’s British people spent 25% of their budget on food. In the early years of the new century it hit a low of 7% (it has recently risen to 12%). Let us look at the price of a loaf of bread.

Cost (say) £1.00
Weight (say) 800gm
Weight of flour needed 500gm
Therefore weight of wheat needed 600gm

600gm of wheat as a world commodity with the 6th January 2012 price of milling wheat at £157/ ton would be 9.4p. The raw food material cost of wheat is less than 10p. If the world price of wheat were to have doubled over the last year then the price of the loaf should have been driven up by10p, a 10% increase.

As food is less than an eighth of the average budget the impact on inflation would be less than 1.5%. This would only be the case if all food commodities doubled in the last year. They have not. The price of wheat on the London Futures market is £157/ton. It would have to have been £79/ton a year ago to give a 10% price increase. According to the HGCA the price of wheat a year ago was not £79/ton but was £214/ton. In other words the commodity price has fallen by 27% while the price on the shelf increased.

We all deserve an explanation as to how a fall in the world commodity price can cause not only an increase in the price in the shop but also a lot of false spin as to why. Food should be produced on farms and eaten off a plate. It should not be used to gamble with as ‘chips’ in the casino of world commodities.

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