Sushi Money

So now we read that many consumers are spending their tax rebates to cope with the soaring cost of living?   No kidding!  It should be no surprise to anyone that inflation is taking an enormous chunk out of the typical family’s monthly budget.

In some areas we are cutting back and spending less money.  But the real problem for consumers is that we’re spending more money and getting less for it than ever before! 

I haven’t run the numbers, but I know we’re paying a lot more for basic needs this year, and it really has changed our driving and consumption behavior.  

Joseph LaVorgna, chief U.S. economist at Deutsche Bank, thinks at least half the rebate money may go toward energy costs alone.

“It’s not going to give you the bang for the buck as originally envisioned,” he said. “The odds of it having a longer-lasting impact on the economy are less. … People were not planning to use so much of it on energy and food.”

Diane Swonk, chief economist for Mesirow Financial in Chicago, also estimates that consumers will spend more than half of the rebates — but much of it on the higher cost of living, citing evidence of a “very stressed consumer.”

Although the government formally says inflation is under control, you don’t have to walk very far to find people who are paying for huge increases in food, transportation, and services.   We are seeing “fuel surcharge” on receipts and big ticket items more frequently.  And when we head to the airport next week to visit relatives for 10 days, we may have to pay for our checked baggage. 

There’s supposed to be multiple investigations taking place in the commodities markets.  It’s never that simple, but maybe the government will close a few loopholes and change the laws that allow rampant speculation in the energy markets.

Okay, the rebate check is in the bank and we’re going through the budget again.  I was shaking my head at the price of groceries and gas today, but it’s hard to see much of an economic slowdown by the amount of traffic out on the roads.  People must be cutting back though because everything has gone up in price recently. I’ve even heard some of the restaurants are struggling. 

We’re learning like never before how fuel prices really impact consumers and the needs of the family.  Simple things such as a trip to a nearby town are put off until really necessary, and I find myself driving a lot slower than I used to.  Some enterprising automaker should come up with a really efficient vehicle they call the Frugal.   I’d call it our Family Frugal and drive it proudly around.  Not a very sexy name perhaps, but heck I’m all about practical efficiency these days.  Actually it sounds kind of like a Volkswagon… Das Familie Frugal.

Ah but we use fuel for more than our vehicles.  We use propane fuel for some of our winter heating needs, and I usually fill the tank in late spring each year.  But with oil prices out of control, propane prices are crazy high too.  Do I fill the tank now, or wait until next fall or winter?  I’m inclined to wait and see if somebody… anybody, will do something about the rampant speculation in the oil markets out there.  At some point these high prices are bound to blow off.  It’s bad enough with gasoline, but the debate even involves diesel fuel supplies which are tighter and more expensive.  It’s a problem we need to solve because it affects everything- driving cars, trucking and transportation for goods, grocery prices, heating, etc, etc.

Members of the House Transportation and Infrastructure Committee’s Highways and Transit Subcommittee generally agreed that diesel prices have risen faster than gasoline prices, and that increases are reflected in higher food and merchandise costs. But they broke along party lines in suggesting ways to address the problem.”The conventional wisdom is that speculation provides liquidity to the market. But when you have a huge entry of people who have no intention of taking delivery of a commodity but are merely interested in making money by bidding prices higher, that’s a different matter,” Rep. Peter A. DeFazio (D-Ore.), the subcommittee’s chairman, said in his opening statement.

But Tyson Slocum, energy program director at the consumer advocacy group Public Citizen, agreed with DeFazio that speculators are exerting an unhealthy influence on energy commodity markets. “A certain amount of speculation or hedging is essential. But we have a financial bubble resulting from too much speculation. About 95% of the trades today do not involve taking delivery,” he said.

DeFazio still was interested in the possible impact of speculators on oil prices. “What would it hurt to have trades no longer opaque and off the books?”

I’m a pro-business, free market kind of guy, but when you have a critical commodity that drives every aspect of the national economic engine, how can we allow speculators and commodity investors to leverage investments in oil contracts that will never be delivered?  And if oil prices just keep going up, can the U.S. economy and consumers even survive in that environment?

Here’s one for you:  Just yesterday I was talking with the local propane company manager about fuel prices and my propane bill, and he spoke of a close friend who was a truck driver.  This guy regularly drove from the midwest roundtrip to the south and southwest, but his normal routine was to fill up his truck’s fuel tanks in Mexico!   “Why does he do that?” I asked, and the answer was that truckers can buy a cheap $20 pass to cross the border to buy fuel and they pay half the price for gas and diesel that we pay in the U.S.!   

Why does gasoline or diesel fuel cost half as much right across the border in Mexico than it does in the U.S.?

I don’t know how accurate that is, but the propane company manager I spoke with said it was true.  Perhaps Mexico has more reserves for oil, more drilling, more refineries… oh, maybe that’s why it costs less?   Even so, should petroleum products be half-price just across the border?  If it is, then we’re doing something wrong here in the U.S.  Hey, maybe we can tie in some of the immigation issues with cross-border agreements for oil or fuel?

But with the economy still teetering on the edge of a recession, at least Alan Greenspan thinks that ”the worst of the credit crisis is behind us.”   But what about inflationary costs to consumers for fuel and grocery prices?  I’m really not sure what Congress is doing beyond posturing and looking at raising taxes.  Is raising taxes on fuel and energy companies going to save consumers money?  I don’t think so.

I’m still calling for a U.S. Energy Summit however.  We’re not going to get anywhere if people don’t stop pointing fingers.  They need to sit down and map out the issues- start taking proactive measures and move forward with a plan for the nation. 

But in other news at the homefront, we’re busy planting a garden this year.  A different kind of fuel for the family perhaps, and another way to live a little more frugally.  With a little bit of space, how hard is it really to grow a few vegetables?  Especially tomatoes, but this year we’re even planting corn.  It’s much cheaper to grow your own, but admittedly it does take some effort to get started.  But if we’re successful and have enough veggies, it will cut down on the grocery bill.  And we hope to freeze and put up some of the extra to last into winter.  Now if I could figure out how to grow our own fuel for the cars we’d really be doing well. 

If it seems like the price of everything at the grocery store keeps going up, you’re not alone. Wholesale inflation has risen at the fastest pace in decades, with a January surge of 7.5 percent over the past 12 months. When wholesale costs rise, so do the prices that consumers must pay of course, and the cost of food is a huge expense for most of us.

“Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.”

In recent years we’ve seen price fluctuations for all kinds of food products. Retail food purchases for consumers is primarily a local event… we shop at the corner store, and shake our head when we see prices for milk, eggs or cereal go up. In the past when I saw higher food prices I thought it was temporary. But over the last year it has become evident that the price of almost all the food we buy has continued to increase.

Here’s a CNBC screenshot from last week talking about essential food ingredient prices. I’m not sure of the data that the American Baker’s Association uses, but they’re saying we could be paying almost $5.00 for a loaf of bread next year!

And why is corn sweetener up there? Because hundreds of food producers use corn sweetener instead of sugar because it costs less. At least historically. Now corn is in high demand for a host of reasons, not the least of which is the production of ethanol.

Agricultural costs have increased tremendously throughout the world, both due to fuel costs as well as global demand. Within the U.S. a lots of folks are citing ethanol production as the primary reason for rising food prices, seeing the diversion and diminished supply of corn as a major factor. Ethanol is a huge factor affecting grain prices, but many experts see the greatest influences from global demand for food coupled with production swings and weather impacts such as drought.

But let’s look at ethanol because it’s a primary agent of influence within the U.S. agricultural sector. Based on USDA estimates, the percent of corn produced and used for ethanol production is going to double, rising from 14% to 30% over the next 10 years.

It’s like a storm of conflicting forces for which we have no easy answer. In effect, we are growing food to eat and to put in our cars! When farmers increase corn production they produce less of something else. In the U.S. that typically means alternating corn for soybeans, and if there’s less supply of one product, that usually results in greater demand and higher prices for it. Based on current global demand, the net effect is rising prices for all agricultural sectors. The USDA’s assessment of the impact of ethanol production presents clear evidence for the food price increases that we’ll see in the years ahead.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs, it will also most likely mean higher food prices for consumers. Retail price increases for red meats, poultry, and eggs are projected to exceed the general inflation rate in 2008-10, as the livestock sector adjusts to higher feed costs. As a result, overall retail food prices would rise faster than the general inflation rate in those years.”

And in a global economy the economic ripples of food supply and demand have far-reaching consequences.

“Most important, a period of protracted higher food prices will be bad news for many of the world™s poorest people and its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa.”

Another USDA article examines how corn production and consumer food prices are related. Although it helps explain commodity price influences, after you read the article it doesn’t seem like the USDA really looks at what’s been going on for consumers, but the research provides some key insight. In the language of academic researchers, the USDA explains that retail competition moderates food price inflation and provides stability:

Overall, retail food prices have been relatively stable over the past 20 years, with prices increasing an average of 3.0 percent per year from 1987 through 2007, just below the overall rate of inflation. The main exception occurred when sharply higher farm prices increased retail prices 5.8 percent in 1989 and 1990. Since then, food price inflation has averaged just 2.5 percent per year.

Retail prices are a function of both consumer demand and the interaction between food manufacturers, distributors, and retailers, with each group having some pricing power in the supply chain.

Well, however stable and whatever the “pricing power” of the supply chain, those of us filling up the shopping cart just see prices going up! Keeping in mind that these charts are 6+ month old data, that inflation spike for the Food CPI has continued to increase throughout 2007 and 2008.

Here’s the heart of the issue:

When there are cost shocks in the food production system due to changes in the commodity or farm product market, most retailers respond by passing on a fraction of their higher costs to consumers.

That about sums it up. We’re going to continue to see food price increases over the next few years, if not the next decade. Agriculture will also be subsized less by the government in the future, which means the increasing costs of production and transportation will be passed on to consumers. Groceries and gas are simply going to stay a lot more expensive over time.

Hence, U.S. consumers are not happy right now. Between gas and food, there are too many increases to prices that the average family sees each day. It will be interesting to see how U.S. consumers change to meet these challenges over time.

What can we do for our own families and at home? I was joking the other day about having our own chickens for eggs, although that would be pretty cool if I didn’t have to shovel you-know-what. We’ve already got too many pets as it is. But we can grow and make more food at home! If you’ve had a garden before, you know it provides a lot of home-grown food for comparably little effort (although it does take effort!). A few packs of seeds or plant starts and some TLC, and you can have a bunch of fresh vegetables. Honestly, there are few things to rival the enjoyment of eating food you’ve grown and prepared yourself. Sustainable living is going to take on new meaning for a lot of people.

Personally we’ve begun to change how we shop for food, as well as prepare food at home. As we gear up for the spring and summer gardening season my wife has been baking whole-wheat bread at home. It’s really very good, and costs about half as much as quality store-bought bread (No, you can’t compete with plain squishy white bread by making it at home… unless you’re using paper- but then again it might provide about the same nutrition!). And yes, there is the time involved in preparation, but with a little planning it still saves money and is a lot more rewarding.

Does it really make a difference financially? Yes! It saves dollars and helps foster a mindset of controlling costs and producing more at home. Admittedly it’s hard to make a real dent in the overall finances without a concerted effort though, and that’s something a garden really helps with. Frugal shopping, buying in bulk, staying healthy… it all adds up to lower costs over the long run.

So we’re reading and learning about new ways to save and do more at home. What do you do at home that makes a difference in your financial lives?

For investors, lots of smart folks have jumped on the commodity bandwagon over the past year. Between natural resource and commodity stocks and funds, investors have made a small fortune over several years. I was big into natural resources and energy stocks from ‘02 to ‘05 and then pared back my holdings. That was a mistake for which I then proceeded to miss a lot of the continuing advance. I haven’t changed my core retirement portfolio of balanced stocks/bonds for the long-term but will look a little more closely at commodities going forward. Many professionals believe there is a lot more room for the commodity bull to run and the data at present backs up that view.

For an excellent assessment of our current economic challenges, Money and Markets provides a sobering assessment in Three Great Investment Opportunities and One Grave Danger For Your Portfolio. If that’s not enough to motivate someone to re-think investment goals and tuck away some extra savings, then I don’t know what is.

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    A long time market sage and renowned investor, Jim Rogers, has proclaimed the U.S. is “undoubtedly in recession” already.  That may come as a surprise to many economists, especially those who monitor hoards of statistics.   It is true however that recessions often begin with little concrete data to show the economic reality that defines it at the time.  Some recessions are only revealed after they’ve been underway for a while.   But is Jim Rogers right?  I respect his views, but somehow he has always appeared quite negative on the U.S. economy.  In fact, I think he has been predicting a U.S. recession on and off again for the last 4-5 years now.  From my reading of his strategies, he’s often a contrarian and sees the world from a “glass half empty” viewpoint.  But he’s an interesting guy, with equally interesting views that I think are important to consider to gain a larger perspective.

   Interestingly, with his contrarian approach, Jim Rogers even believes the Fed should be raising rates instead of cutting them.   His view of the Federal Reserve cutting the funds rate is that it will result in a lower U.S. dollar and lead the nation into a recession. In a September  2007 interview, he stated that by raising interest rates, the Fed would “quell inflation and support the U.S. currency.”   I sure don’t agree with his view of raising rates in light of the housing and credit crisis challenging the nation, but I understand his view and concern for the overall economy.  It’s a tough situation and quite a balancing act for the Federal Reserve which meets in about a week.  Personally I wonder if they will hold off a rate cut this time for precisely that reason- appearing too concerned about the economy while potentially letting inflation rear its head.  I do think rates are on a downward trend, but we may not see a further rate reduction until November or December.   Are we in a recession now?  If not, are we going to be in a recession?   This week former Fed Chairman Alan Greenspan reiterated his view that the possibility is less than 50-50, but acknowledged the U.S. has a long way to go amid the “fear in the credit markets.”  Housing and mortgage issues remain the major themes, especially in terms of the effect on the economy as a whole.  

     What do you do when it seems like everything is getting more expensive? When I head to the grocery store I keep seeing higher prices and wonder why stuff costs so much more than it used to. Lately I’ve had that experience more frequently than in the past. Inflation may be under control from a macroeconomic perspective, but it’s not under control from the family grocery shopping perspective, or for fuel or electricity costs. Our family is not struggling by any means, but we do try to shop with an eye on prices and work hard not to overspend the budget. Yet when I find prices of grocery items influencing my shopping habits, I’ve got to wonder how other people are doing that really are struggling financially. Energy costs are one of the biggest culprits of course, especially as companies pass their energy costs on to consumers. But what about certain farm subsidies, especially where propping up ethanol production is concerned? Corn and other grain products are in such demand that costs throughout the food processing spectrum are rising like never before. Maybe catching up as well, but it’s still fairly amazing.

     I’ve had these thoughts for some time, but today read an interesting article about how Living Paycheck to Paycheck Gets Harder. Similar themes in the article, especially for shoppers. I found it interesting that Wal-Mart and other larger retailers are seeing the spending gap in the days before and after payday get much larger. In many ways that alone might indicate a recessionary theme for the economy. Once you factor in energy prices and local economic issues such as employment, family economic well-being really becomes a critical issue in many communities. I suspect we’ll see a lot more about this theme in the months ahead, especially with the 2008 election in full-swing. Do you find yourself living paycheck-to-paycheck? I think a lot more families are, and that has me concerned about the next few years.  My nature is to look at things postively, with an optimistic eye for the future.  Heck, I just wrote about Appreciating the Economy a couple weeks ago, but I think it’s also important to look at the challenges people do face.

     Back in the early ’90’s, the first President Bush lost the election because people were very concerned about the economy, and it seemed like the political leaders were out of touch with the reality that many working families face. Remember “It’s the economy, stupid?” Seems to me like we are seeing the same thing happen all over again. Certainly there are many aspects of the U.S. economy that are strong and vibrant. But to ignore the challenges and realities that many families do face is akin to turning away from the problem. Those political leaders who do address these issues in a constructive and positive manner will be heard much more clearly from the voters. Personally, I don’t care about the political aspects other than to see that we are helping Americans to grow and succeed in their lives. There are so many ways to foster financial literacy and economic well-being in the nation. Education is vitally important, as are employment and tax incentives for businesses, homeowners and families with children.

     More importantly however, there’s a lot we can do locally to help others. Just taking a few food items to a local charity or food pantry can really make a difference, especially as we head towards winter and the holiday season. Hopefully we won’t see a recession in the U.S., but whether we do or don’t, there will still be a lot of families that need our help.