July 23, 2021

Why is it important to understand Global Food Prices and how can we prepare for it?

What is causing this surge in food prices globally? What effect will that have to people?

In this video, I will help you understand what is happening in the market since there are a lot of conflicting messages on the internet, from the government, and different entities.

90% correct transcript

So good morning everybody. And welcome back to my channel. And today I want to cover an interesting topic, which is global food prices. So it just got on a news on Bloomberg, and there has been a lot of talk about inflation, and we covered this in investing a celebrator as well in terms of detail, how to take advantage of inflation, so on and so forth. But I also want to cover it on this channel to basically help you understand what's happening in the market, because there's a lot of conflicting messages on the internet. There's conflicting messages from government and different entities as well. So it's important to understand what's happening in the world and how we can prepare for it. So let's start by reading this article and then afterwards we'll dive into a specific commodity prices. And then afterwards we'll end off with some sort of conclusion if there is any so gold global food prices, surge to near decade high United nations SES.
So this is quite alarming because if you backtrack a little bit, maybe just around 12 months ago, the market was crashing because of COVID. And the first thing the feds did was to print more money. And at that point they say printing more money wouldn't cause any trouble, whatnot. And now here we are seeing an article saying global food prices are surging. Now of course they will say there are a lot of different factors influencing global food prices, but let's dig a little bit deeper to see what is Dem out of truth within that. So a United nations gaged of world food costs climbed for 12 straight month in may. It's longest stretch in a decade, the continue events risk of a celebrating broader inflation complicating central banks efforts to provide more stimulus. So this is becoming a fishes cycle, um, where you print more money, you get more inflation, things become more expensive. And then that will lead to another wave of bankruptcy, higher interest rates. And basically that is the world we're going down now. Um, here is actually a quite a helpful chart provided by Bloomberg. And here you can see back in 2011 food prices was really high and this was maybe three years after the 2008 crash. And now we're basically back at that level. So for many years, between 2015 to 2020 food prices were really no.
And if we go down a little bit, then here, we can see that there are certain areas that rely a lot on cereal, um, which is their main source of food. And it is actually mainly the, uh, African countries here and also middle east as well. Now this map is a little bit important because once you go down, then Bloomberg will present you with the overall food index, which compared to last year, it is 40% gain. So if you have been reading a lot of government articles, then they will say the inflation is two, three, 4%, which seems a lot lower than this number. So the question is, well, what is the real inflation number? Because right now United nations say the overall food index has gone up 40% and food is a large part of consumer spending's. So if you look at the individual items, then here, you will see cereal, uh, which is why Bloomberg provided you with the map here to S to tell you which countries are the most impacted.
Now, in this case, you will see the United States and Canada Africa don't rely on cereal or grain as much compared to some of the African slash Asian countries. So if you go down here, then the next thing you'll see is vegetable oil, which has increased significantly as well. And afterwards you get airy meat to typical stuff and then sugar. Okay. Now, if we think about this and think about what has been happening in the last 12 months, first, you get the Fed's printing money. We know that already second, you get supply chain issues. And there are actually two main supply chain issues that come to our mind. The first one is, of course COVID because people kind of work, people stay at home and in the developing countries, then they might even go to work, but then there's a higher depth rate and also infection.
So there should be some impact to the supply chain there because of COVID now to the second events that impact supply chain was really to Susie can. Now, now it doesn't hit the news anymore, but I think it was just, um, a month or two ago. Uh, there was a ship that was horizontally place on a sushi canal near Egypt, and afterwards for around in a week or two, a lot of, uh, cargo was blocked, uh, because that was a major canal to transport between, I mean, Asia to Europe. So I wouldn't be surprised if that also has a factor too, the price increase. So then the question is, well, how much of it is because of the supply chain and how much of it is because of money printing. Now, we wouldn't be able to arrive at his exact cancer, but we should be able to get a good understanding of kind of the split and the drivers.
So first let's look at the us monthly inflation rates. Now this is, um, source from Statista, which is sourced from the U S government. But basically what this is showing you is taking this month inflation or the consumer price index, um, compared that to the last month. So what you'll see here is that kind of in a COVID time when COVID just hits, uh, north America, and of course the rest of the world, there wasn't much inflation. And this is of course just slightly before money printing. And then afterwards you will see that inflation is starting to kick in, of course the economy is recovering. Money is printed and data's not being brought back or destroyed or anything like that. So it is still circulating within the system. And now we're at 4.2% compared to last year, April. So you can see, this is kind of the number that is being reported on news or reported by feds, which it contains a basket of goods.
So this is the monthly inflation rates for goods and services within United States, which this includes housing, this includes food, transportation, and all that. Um, and when you're thinking about inflation on the consumer side, what you're really thinking about is that there is a leg. So just because there's an impact on something like corn or vegetable oils today is not going to hit the consumer months later. Now, what that means is because if there is an increase in costs, let's say somewhere in Indonesia, a new festival oil that is being produced, there will not arrive in the United States until at least three months to six months, based on my experience with supply chain and logistics. So you wouldn't see this until a lot later. And right now you're really looking at the coffee futures. So coffee is obviously usually imported into north America and previously in the 19th, 20th a year, the average price is somewhere between a hundred to 130.
So you can see it here. Now, if you're not familiar with discharged because you haven't learned anything about technical analysis, there is a free chart course down there that you can just register or just go to the free webinar. Then you will learn that as well. Um, so for the last couple of weeks, you are able to see that the price has significant increase, and now it is closer to one 60. So just looking at this chart alone, you, it has gone from, let's say we take an average price of a one 10 to one 60. So that's almost a 40 to 50% increase within this short period of time, which is one year. Now, if you zoom out a little bit more than the question as well, has coffee gone up to that price before and answers? Well, yes. Well, in 2016, in 2014, coffee has actually gone up.
Now this might be due to other reasons, but right now coffee is back up. The next one I wanted to look at with you is really corn. So if you go to corn F, which is the corn future, and here, you will see that for corn before 2021, the average price was actually around three 50 to $400 or so. And you can see this is actually pretty stable, but after the pandemic money started printing, and we're also in the recovery stage of COVID, you can see corn has actually gone crazy, and it went up from $400 to 650 or so, okay. So let me bring out my trusty calculator and just try to be more accurate when it comes to the increase. So that has a 64% increase. So that answer is yes, inflation is not hitting the us consumer price index at the moment, but corn futures has already gone up 64% now to the next one I wanted to look at was really lumber because I think a month or two ago, um, the housing market has been crazy.
Basically people are buying houses and lumber prices are also going up a lot. Uh, so let's look at lumber as well. So here you will see that historically lumber future is somewhere between 300 to $500. And just after dependent from March onwards, you can see the commodity price has been going crazy up. And it right now is at 1325. Now, at this point, while you might be wondering what was there an opportunity to invest in lumber? The answer is yes and no, which we'll dive into the data in a bit, but this is such a high price that investing in lumber right now would be very risky to do. So, all right. So when you're looking at this increase, this is probably the more ridiculous increase compared to corn and coffee. So just let me bring back my calculator out and you will be one, three to five divided by around, let's say $400, which is the average price of this range one to two years ago.
So that's a 230% increase. So this is going to have a lasting impact onto houses that are being built. And the last one to two years now, if the builders are able to pass on this cost to the consumer, which they probably will, which means to housing prices for this period, all the new ones are being built will be higher costs. Now, of course, there are certain instances where they are pre-sales in the market. And in that case, the developers to have already agree on a price. We'll either a go bankrupt and they wouldn't do the project anymore, or their margin will be significantly squeezed. Now, chances are, I think we wouldn't see that immediately. Maybe perhaps a little bit later, if lumber prices are sustained as such a high rate, then you will start seeing, uh, construction projects being priced higher, or even some companies need to go bankrupt because they are not able to fulfill that development contract with the pre-sale, um, unless they're able to negotiate somehow to up the presale price, uh, which can be a devastating, uh, impact as well.
All right, so let's dive a little bit deeper into the lumber shortage because I think we have the most information there. And also it helps us understand the housing market as well. Um, so first, uh, here is an article construction dive, which explains why to lumber prices are spiking, which the economy miss expect that it will be resolved later this year and expect prices to be remained high in 2022. So that's what I'm talking about earlier, where if lumber prices are really high than some of the previous projects where they use an assumption in the model, let's say the number of prices 400, but now it's 1300, the project will become unprofitable or a lot less profitable, which will then later on pass onto the consumer. So the demand for lumber is exceptionally high and the supply is constraint. Okay. So the question is, well, is this guy telling the truth so well, let's look at some data.
So obviously Canada is one of the countries that produce a lot of lumber in addition to New Zealand. And I'm suppose there's also some lumber in us, but I happened to find this data. And basically what I gathered too, is the total softwood and hardwood production, shipments, and stocks. So what I'm trying to get out here is really to see if there is an increase in production because lumber prices are so high. And if there is an increase in shipment, if there is an increase in shipment and production, then in a sense that is a little bit more comforting because you can see that the increase in lumber futures is being addressed. So then lumber, future prices will eventually go down. But if we don't see such increase, then we will think that, Hey, maybe the production and shipment is not that flexible. So that means they're not being able to produce more because probably the plants are operating at full capacity or the demand has increased.
So then lumber prices will continue to be high. So then housing prices will continue to be high. So that's what we're trying to think about when we're looking at this data. So I've download this data in Excel. And basically before we look at this chart, this is the data I have cleaned it a little bit. Uh, but basically this is the charts Dow come up. I didn't bother naming the chart title or what not because we'll just look at this together. Um, so the first line is the blue line, which has production. Now here, you can see production is kind of steady between 4,000 to 5,000. And you can see there is a drop slightly after COVID, but I suppose sawmill and lumber production is considered to be essential. So then they kind of resumed quickly after a month or two. So when you think about the production of lumber, this is really not a constraint because relatively speaking, it has been consistent over time.
Now, what this means is twofold. First is the plants are either operating at a hundred percent capacity. So then this is actually what they can produced, or there's some sort of regulation that prevents them to cut down more trees in a short amount of time. So then it's not like they can increase the lumber supply that quickly. So that is the first factor. The second factor is, of course, well, if you need to build a new sawmill or basically hire more workers, it's not that easy because during COVID, it's more difficult to hire and building a plant, also take a couple of years as well. Now on the next thing is really shipments. If there is a higher demand and they are not able to produce more than naturally, if they ship more than they might be able to draw on the existing inventory. Now, interestingly enough, we actually see the orange line to be relatively flat as well.
So whatever they produce is whatever being shipped. And here you can see there is the stock line as well, which is the amounts of inventory. And it is not exactly increasing as much as I thought. So it seems like there is a lag in the system where even though lumber prices are so high in terms of future, it is not being reflected in the supply chain. So this is really the production side, the supply side. Okay. All right. So now we kind of understand that the lumber supply is relatively fixed. Now this is just for Canada, but I assume this will be fairly consistent with New Zealand and also a United States if they cut their own trees, but it is becoming more and more precious to have lumber because you can imagine the prices are high. Basically people are bidding on it. So then now the question is, is there a higher demand?
So what I then found was the United States census bureau, which is new residential construction. So basically this is new homes being built and I basically downloaded Excel and here is the new homes being built. So here is United States. And in this case, they actually have the data forensically from last year, April two, this year, April. And what you'll see is that the number of units have actually almost doubled. Now during the pandemic, we can see that, Hey, maybe there is a lower amount of homes being built. So then that's why it's a thousand. And, and now it is 1700. So this is actually a 70% increase in terms of homes being built, which puts pressure on the supply chain when everyone is still kind of staying at home, um, and kind of trying to get rid of COVID. So you can see there is a significant demand.
And now we're really stepping into the stage of recovery when it comes to the economy. So that means eventually the sawmill needs to be built or more trees needs to cut down in order to address this demand or else home prices will increase significantly. Let me bring you back to the news article here. And then afterwards, there's also a full report as well, which I've opened a PDF here. Now, in this case, you'll see the new residential construction, which gives you a little bit more data, which is the 16th of 2016 to April. And you can see historically it actually ranges between this 900 to this 1500 range. And after COVID, then there's suddenly a jump from this 900 range all the way to 1800. So overall, I still think this is an uptrend. And when you look at the lumber production, it doesn't seem to increase as quickly as the new residential construction units.
So that puts an increasing amounts of pressure on lumber prices, which leads to the increase. So yes, Fed's printing money. It does impact lumber prices, but at the same time, because the economy is reopening and basically people didn't really build that many houses back in, uh, 2020 April. That pressure is now shifted to 2021. Now let's bring you back to food prices because now we have a good understanding of the supply chain of lumber. What about food costs? So here, um, basically food costs rise as supply chain issues per, uh, persists and COVID pandemic amid COVID pandemic. So this is from ABC Chicago news.
And basically one of the things I wanted to analyze was really whether the supply chain increased a lot because of COVID for certain countries. So if you haven't been paying attention to news, then you will find that for example, um, the Southeast Asia countries currently have an outbreak in Thailand, Malaysia, so on Philippines. And if we look at some of the data, which is Ashley's vegetable oil in this case, and you can see that China, Indonesia, Malaysia produces majority of the vegetable oils in the world. So the total here is 1 55. And let me just kind of combine this together and then do the math for you.
This case is 21 plus 30 plus 20 divided by 1 55. So that means 45% of all of the vegetable oils in the world is produced by Indonesia, Malaysia, and China. Right now, China still closes borders. Uh, even though they have a very low number of COVID cases, Malaysia Indonesia have a very high number of COVID cases. And if you imagine the vegetable oil from south east Asia needs to be shipped to Europe, they probably need to go through to Susie can now, which is the shorter path. And when you think about all these three factors together, and that makes sense why the vegetable oil has gained so much, because there's probably that delay in terms of supply chain, COVID impacting the production of vegetable oil in Southeast Asia country and also China and also money printing as well. So when you're looking at the price increase here, in terms of commodities across the board, it will be in addition to money printing.
So it's not just inflation, but because of supply chain issues because of money printing. And because of COVID all the food prices are going up. Now, if you don't see food prices going up today in your local supermarket, it just means that there's probably inventory within your city or province or state that is not run out yet status at a lower costs, but any new import coming into the country will be at a higher cost. So I think that is really the longterm effect of COVID, which will probably last for at least I think one to two years, maybe even three, four years, unless they're able to wrap up that production to a reasonable level or people, um, have reopened the economy in such a way that that demand is flat again. Um, so you can imagine if a company fired employees during COVID and now they're trying to hire the workers back, this leads to a shortage in the labor markets.
So that's what you're seeing across the board for food prices, housing prices as well. So letter, this is correct or not whether, you know, feds should have, or should not have printed money. I think this is the reality that we're living in, uh, dealing with higher costs in terms of everything. And when you think about the rich and the poor, uh, obviously if someone is investing in the markets, they should be relatively inflation sheltered because all the equity stocks has, uh, have been going up. But if someone that is not investing someone with a lower income and kind of live paycheck to paycheck, then this will be a major concern for them because you can imagine within their monthly budget, uh, food costs will be rising 10%, 20%, or even 30%, depending on what they consume. So this will lead to starvation in some of the poor countries in the world.
And also some of the lower income people will have less food onto PayPal as well. So when you're thinking about investing, this is actually something we covered in investing a celebrator months ago. Um, and that's why we look at the market on a weekly basis to figure out what's happening. And when you are able to have this kind of insight and thinking, uh, combining with technical and fundamental analysis, then you'll be able to take advantage of the increase in food prices. Now, when I say take advantage, it doesn't necessarily mean you're able to impact the market. The market will do whatever it wants. The lumber prices will be going up regardless whether you invest in it or not. So the only thing you can do is really participate in the market in such a way that shelters you from these shocks or helps you ride these shocks in a way that you're not at a relative disadvantage to people who don't participate in the market of at all. And of course you don't want to be on the losing side as well. So that's another video of us kind of covering how to think about the global economic situation and what's happening in the markets. So if you liked this video, then give me a like that will help the YouTube algorithm to promote it to new audiences.

About the author 

Eric Seto

Eric Seto is an investor with over 10 years of experience. He travelled around the world to help with auditing, accounting, purchase and sale of companies.

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