Sunday, January 13, 2008


According to a feature article in The Economist, food prices have risen by 75% since 2005, after having fallen dramatically over the past 25 years. According to the article, it’s been more than 160 years since prices on food products have risen so substantially. In addition to biofuel production, an increasing global population and higher rates of income worldwide are exerting inflationary pressure on food products.

The U.S. and China signed an agreement calling for a greater American role in certifying and inspecting Chinese food products, including the presence of American officials at Chinese plants. The pilot project includes mushrooms, olives and farm-raised fish.

As oil hits $100/barrel, steamship lines are implementing “Emergency Bunker Surcharges,” generally raising ocean freight rates worldwide by $50-200 per container.

Above are four graphs of the U.S. dollar plotted against the euro, Chinese yuan, Thai baht and Canadian dollar. The euro graph covers the past two years, and shows the dramatic decline in the dollar of almost 20%. While most everyone is familiar with the situation of the euro, the other three graphs show some changes that many overlook. The graph of the Chinese yuan runs for the past 5 years and shows a perfectly stable currency until mid 2005, after which there has been a drop in the value of the dollar of about 12% - and the rate of decline has increased over the past few months. The graph of the Thai baht similarly shows stability for many years, but a fall in the dollar’s value of 29% over the past 2 years. Even against the Canadian version, the U.S. dollar has fallen by about 15% over just the past year alone.

The decline in the value of the dollar has raised the cost of imported product. How much impact is felt in the market is generally a function of the extent of the decline, and also longer term competitive issues. For example, if an item is always imported (such as Spanish Green Olives), there will be a more direct impact between currency and price. If there are competitive items from other countries that can substitute, then there could be less of an increase (for example, ripe olives, imported peaches, or for that matter imported Hondas which need to compete with domestic olives, peaches and cars).

After a month of stability, raw material costs are again firming. Skipjack is trading at $1550-1580/mton, up from $1450. Yellowfin is at $2150-2200, up from $2100. Albacore is at $2350, up from $2250
Tongol, which is a local fish of Thailand, Indonesia and Vietnam is now off-season. Philippine packers are complaining that their exports to the U.S. have fallen to the lowest volume in six years. The single duty for 2008 is estimated to have been filled in a matter of seconds, continuing the trend of the past few years.

Raw material situation has improved over the last few months but demand remains strong and market is tight with packers still facing backlogs. China, initially thought to be a viable option to cover some of the shortfall of the traditional sources (e.g. Thailand, Indonesia, Malaysia, etc), fell short of its expected export volume. Thailand is expecting a total crop of 1.8 million mtons, compared to 2.4mm last year. Significant improvement is not expected until the middle of the year.

China has begun the first cycle of their harvest season; while the initial weeks were good, the last few weeks have reportedly slowed down. The next round in the harvest is not expected until after the Chinese New Year (mid February). India is still shipping slowly and remains bogged down by compost issues.

In a telling sign of the condition of the Italian tomato harvest, the USDA reports that in the second half of September 15,000 tons of tomato paste was shipped from California to Italy and further tonnage is being negotiated. In addition, forthcoming subsidy changes (Common Agricultural policy reform) are pushing Italian farmers to cut acreage. In China, the tomato crop is estimated at 4.6 million metric tons for 2007, just behind the U.S. according to the World Processing Tomato Council. About half of China's output of tomato products emanate from a single company - Cofco Xinjiang Tunhe. The company supplies bulk paste to H.J. Heinz Co., and Unilever NV and may be "ripe for picking" itself according to a report in The Wall Street Journal.

As previously reported, prices are up slightly from last year due to continuing labor shortage in the major fruit producing regions and the stronger Chinese yuan. Fruit quality is good.

Even with a decent olive crop, prices for olive oil have firmed considerably over the past two months, primarily because of the strong euro vs the dollar. In addition, large Spanish cooperatives are rumored to be strategically holding off selling with the goal of pushing up prices. On the domestic oil front, crude soybean and canola oil prices have been hitting all time highs, translating into higher prices for blended oils. Above is a graph of the soybean futures market plotted for each year from 2002 through 2007. The recent dramatic rise is displayed by the yellow line on the graph.

Chile has reportedly suffered a 20% decrease in production due to unusually cold weather during the harvest. Peru is also running a bit late because of weather conditions.

The winter crop is ending and the summer crop which lasts from Feb to June in beginning. Crop is normal however prices are on an uptrend due to rising fuel and fertilizer costs, and the tumbling dollar against the Thai baht.

With the crop now complete, Spanish saffron packers have withdrawn their earlier predictions for a price decline. While the crop is reportedly better than last year, the strong euro coupled with strong demand is keeping the price steady. In addition, a number of non-traditional export markets (such as Dubai, Bahrain and the other Emirates) have emerged keeping demand strong.

The crop is reported to be average; however, lack of carry-over stock and the weak dollar have firmed prices.

Chinese exports continue to grow – last year by 28% over 2006. The U.S. remains the largest importer of Chinese fruits.

Florida is expecting orange and grapefruit production to fall significantly over the next decade. For grapefruit, the chief economist at the FDOC projects that Florida production will fall long term from 25 million boxes last year to 13 million boxes by 2017. Israel on the other hand is expecting a larger crop this season.