Tuesday, October 26, 2010

The True Price of Coke

Readers of this blog may have noticed that sometimes the First Person pronoun is "I" and sometimes "we." Is it an ego thing? Or is it a grammatical error tendency?
At the beginning of the last Great Depression, Americans spent 23.4% of their income on food, even though the long farm depression had driven down agricultural prices. That ratio has steadily fallen until it is now, even including meals eaten out (where the markup is considerable), the number is UNDER 10%.

Some analysts from various ideological leanings are beginning to agree that the percentages might increase. Part of the relative cost reductions have come from productivity improvements, but it is increasingly coming from fillers. In other words, if a product's price decreases relative to inflation, that might seem beneficial, but we need to compare apples to apples. If manufacturers replaces food such as sugar, with pseudo-foods such as high fructose corn syrup, then the product is different (you can't say a Corolla costs less than a Rolls Royce, because they are fundamentally different concepts.) 

But we are reaching the limit on how much cheaper we can make food before it stops being food. Maybe that's okay. Maybe we've been paying artificially low prices by eating artificial food. And the cost of inputs, such as transportation, could increase sharply. So perhaps we will begin paying the full costs of food. 

How this affects society is yet to be seen, but the topic is certainly more relevant to rural entrepreneurs than to those plying trades in the cities. 
In August this year, Time Magazine quoted an HSBC analyst:

"World agricultural markets have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain. As a result, prices for staples such as wheat, rice, soybeans, and pork, have risen on a trend basis since around 2004 and, more importantly, have become extremely volatile over the years."

Volatility is a separate issue from inflation. But in any case, it will be interesting to see how this movie ends. In the meantime, please pass the cheap popcorn. 

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