Falling Food Prices Ease Upward Pressure On Global Inflation
Agricultural markets remain volatile due to war and hot weather.
Agricultural markets remain volatile due to war and hot weather.
Falling prices for commodities such as wheat or corn are set to slow consumer food price increases, easing pressure on a major driver of global inflation.
But economists warn it is too soon to declare victory. Agricultural markets remain volatile and the continuing war in Ukraine, combined with unusually hot and dry weather in Europe and parts of the U.S., could bring new disruptions to food supplies.
“We’ll see certainly in the short run adjustments in prices,” said Rob Vos, an economist at the International Food Policy Research Institute. “I would be very cautious in making big projections that things are stabilizing and getting better because we still are in a pretty difficult and tight situation.”
Supply problems caused by the Covid-19 pandemic sent the price of food soaring last year. Russia’s invasion of Ukraine in February of this year added additional pressure. The two countries combined accounted for 28% of global wheat exports last year and 15% of corn exports. Russia is also a major exporter of agricultural fertilizer, and Ukraine leads the world in sunflower oil exports.
The onset of the war pushed up global food prices by 13% in March from the previous month, according to the United Nations’ Food and Agriculture Organization.
Prices have edged down since, and in June, they were about 3% below March levels, though they remain higher than before the war started, according to the FAO.
Futures markets point to continued price declines. Wheat futures prices are now roughly where they were before Feb. 24, when Russia began its invasion of Ukraine. Corn prices are at their lowest level so far this year.
A recent agreement between Russia and Ukraine allowing exports of Ukrainian wheat could help cool global prices. After the agreement was signed, Russia attacked two of Ukraine’s biggest ports, Odessa and Mykolaiv, which handle much of the country’s food exports, raising doubts about Russia’s adherence to the deal.
The recent decline in commodity prices has already started to show up in consumer prices in some countries, and economists expect further moderation in coming months.
Annual food inflation in Colombia has eased from its peak in April, even though it remains historically high, according to government statistics. In Egypt, food prices fell on a monthly basis in June, the government reported.
In the U.S., Wingstop Inc., a restaurant chain, said it had started seeing falling chicken prices. “We are benefiting from meaningful deflation in bone-in wings,” said Chief Executive Officer Michael Skipworth in an earnings call.
J.P. Morgan economists now forecast global food inflation rates falling by half to around 5.5% or 6% in the fourth quarter of this year from around 13% in the second quarter.
That would make a big difference in emerging markets, where food accounts for a greater share of consumer spending than in developed economies. Easing food inflation could bring inflation down by 1.5 percentage points globally and 2 percentage points in emerging markets, J.P. Morgan estimates. That could take some pressure off central banks, many of which have been raising interest rates to bring inflation under control.
The U.S. could also see food prices moderate. Agricultural economists, though, say the effect at U.S. grocery stores could be muted. Commodities contribute only about 15% of retail food costs, with labour, shipping, packaging, advertising and profit margins contributing the rest, said Jayson Lusk, an agricultural economist at Purdue University.
Lower commodity prices “certainly can’t hurt,” he said. “From the consumers’ perspective it’s a positive sign that maybe we’ll see some downward pressure or at least a reduction in the increase.”
U.S. consumer food prices, both at grocery stores and restaurants, were up 10.4% in June from the previous year, the highest in more than four decades, according to the Labor Department. Food inflation accounted for roughly 1.4 percentage points of the 9.1% overall inflation rate in June, according to the Labor Department.
Higher prices are prompting some consumers to pull back or switch to cheaper brands. Unilever PLC and Kraft Heinz Co., which own many major food brands, both reported last week that higher commodity costs had forced them to raise prices even though that meant losing some customers.
Mr. Vos said food commodity prices are going down for the wrong reasons. Rather than signalling easing supply constraints, the price declines are a reflection of the dollar’s strength and an expectation that demand will decline as global growth cools, he said.
Since commodities are priced in U.S. dollars, a rise in the value of the dollar tends to push down the price for commodities, to offset the more expensive currency, Mr. Vos said. At the same time, central bank interest-rate increases to curb inflation have raised the risk of a global recession, he said.
On Tuesday, the International Monetary Fund lowered its forecast for global growth and raised it for inflation, as China’s Covid-19 lockdowns, rampant inflation and the war in Ukraine continue to weigh on the world economy.
“There are a few things on the horizon for me that say we may not be done with higher food prices,” said Scott Brown, an agricultural economist at the University of Missouri.
Chief among them are war and weather. Hot and dry weather in Spain, Italy and parts of the U.S. will lower rice production next year, the U.S. Department of Agriculture estimates, which could raise rice prices.
The agency says global wheat and corn production will fall by 1% and 2.6%, respectively, next year. Ukraine will see its wheat output fall 41% and its exports by almost half, according to the USDA.
“There are just so many uncertainties or unknowns right now, if I was a consumer I’d expect a lot of volatility in food prices ahead,” Mr. Brown said.
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When will Berkshire Hathaway stop selling Bank of America stock?
Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)
The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.
It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.
Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.
Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.
Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.
With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.
Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.
New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.
“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.
He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.
If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.
Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.
Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.
Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.
There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.
Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.
It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.
Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.
Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.
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