Yes, We Have No Avocados
by Sinclair Noe
The markets are closed today in observance of Good
Friday.
No economic reports today.
Let’s take a look at next week’s economic calendar. On
Wednesday, we’ll get reports on new and existing home sales. New home sales are
expected to be up slightly, while existing home sales are expected to post a
decline for the third consecutive month. Higher mortgage rates and rising
prices have pushed some potential buyers out of the market. The average rate on
a 30-year fixed mortgage is up almost a full percentage point from its recent
low one year ago.
The softness in home prices in the first quarter has also
hurt homeowners struggling with negative equity. The pool of underwater
borrowers peaked at 12.8 million, or 29% of all properties with a mortgage, in
the second quarter of 2012. Rising prices have lifted millions back above
water. As of the first quarter of this year, some 9.1 million homes (or 17% of
homes with mortgages) were "seriously" underwater, owing at least 25%
more than property's estimated market value.
Next Friday, we’ll see the Consumer sentiment index,
which has been showing a lack of enthusiasm reflecting the weak pace of hiring
and meager pay raises for most households, which in turn results in sluggish
consumer spending.
Thursday, we’ll get a report on durable goods orders. If
economic growth is finding traction, you would expect to see businesses
spending more on equipment, which should show up in the nondefense goods excluding
aircraft, subcategory of the durable goods report. If businesses are seeing an increase
in demand for their products, they would be expected to ramp up production. You
can’t boost profits forever by just cutting costs.
Earnings season kicks into high gear next week. Apple,
Microsoft, AT&T, McDonald’s, Netflix, and Facebook all report next week. S&P
500 companies' first-quarter earnings are projected to have increased 1.7% from
a year ago. The forecast is down sharply from the start of the year, when
profit growth was estimated at 6.5%, but has climbed from a low of 0.6% reached
on Wednesday.
Yesterday, an international deal was announced in Geneva
to defuse the East-West crisis in Ukraine; the pro-Russian separatists
occupying buildings in Eastern Ukraine apparently didn’t get the memo. Leaders
of gunmen who have taken over city halls and other sites in and around Donetsk
this month in pursuit of demands for a Crimea-style referendum on union with
Russia, rejected the agreement struck in Geneva.
Moscow renewed its insistence that it has no control over
the "little green men" who, as before Russia annexed Crimea last
month, appeared in combat gear and with automatic weapons to seize public
buildings - a denial that Western allies of those who overthrew the pro-Russian
president in Kiev do not accept. The White House renewed President Barack
Obama's demands that the Kremlin use what Washington believes is its influence
over the separatists to get them to vacate the premises. It warned of heavier
economic sanctions than those already imposed over Crimea if Moscow failed to
uphold the Geneva deal.
There’s no question the US can inflict great financial damage
on the Russian economy, and there are indications that the Russian economy is
already experiencing the early stages of a recession, but all is fair in love
and war. And Russia can fight back with more than just restricting nat gas
exports. Russia's cyber-warfare experts
are among the best, and they have already attacked – trial runs if you will –
even though that information wasn’t really mainstream news. And the US is
vulnerable, mainly because we are so dependent on technology.
So, let’s take a look at what’s on the menu for the
holiday weekend. Higher prices, at least for food.
Almost everything you eat is costing more, or will. The
US Department of Agriculture had been projecting about a 3% rise in the price
of fresh fruits and vegetables this year; they will have to revise higher. The
CRB Food Index takes a look at commodity prices for a range of foods; that
index is up 20% since the start of the year. And it will likely get worse.
California has suffered a double hit: very little rain in
the lowlands and a lack of snow in the mountains in the north and east. Snowmelt
provides water for many of the state's farmers during the growing season and
for the huge population centers in the south. Snow this year was only about 30%
of the historical average. Now, the snow is melting, and in some streams and
rivers there is so little water that wildlife crews have had to truck stranded
salmon downstream so they could make it out to sea. This likely means some
waterways will dry out this summer.
And while the West has been dry, the Midwest and
Northeast had one of the harshest winters in more than 3 decades. So far this
year, corn and soybean futures prices have increased 15%, and wheat prices are
up 20%. Last year, high prices for corn saw farmers respond by planting the
most acreage in 70 years, which in turn pushed prices down by about 40%. The
USDA says farmers will plant just a little less corn this year and just a
little more soybeans. Market conditions favor less corn, so other crops picked
up acres from corn.
As always, the growing season is subject to weather, and
the past 4 years have not been normal; either too dry or too wet to be ideal.
Some farmers are expecting a return to normal, or at least hoping. And even if
crop harvests are abundant, prices will be underpinned by exports. Of course,
the weather might not be normal.
We seem to be undergoing a change in climate that
resulted in Vermont posting its coldest month of March ever; while nearly
two-thirds of the Great Lakes remained frozen by early April, impacting
commercial shipping; the Northwest and Northern Rockies were wet – too wet,
resulting in a fatal landslide in Washington state; and California and Arizona
had a record warm start to the year, with temperatures in the first 3 months of
the year more than 5 degrees above average. If you are looking for normal
weather, that doesn’t seem to be the direction.
After a drought in 2012, farmers slaughtered huge numbers
of cattle and hogs as feed costs soared. All that extra meat on the market
helped keep a lid on prices in 2013, and now, the US cattle herd is at a
63-year low. If you are considering ham for your Easter dinner, hog prices are
at a 7 year low, but it won’t last long. The smaller supply of animals ready
for slaughter plus the expectation of higher feed costs have sent prices
soaring.
Meanwhile, the California drought will likely result in
higher prices for many fruits and vegetables. Professor Timothy Richards at Arizona
State University recently published research on which crops will likely be
most affected and what the price boosts might be. He estimates the following
possible price increases due to the drought:
• Avocados likely to go up 17 to 35 cents to as much as
$1.60 each.
• Berries likely to rise 21 to 43 cents to as much as
$3.46 per clamshell container.
• Broccoli likely to go up 20 to 40 cents to a possible
$2.18 per pound.
• Grapes likely to rise 26 to 50 cents to a possible
$2.93 per pound.
• Lettuce likely to rise 31 to 62 cents to as much as
$2.44 per head.
• Packaged salad likely to go up 17 to 34 cents to a
possible $3.03 per bag.
• Peppers likely to go up 18 to 35 cents to a possible
$2.48 per pound.
• Tomatoes likely to rise 22 to 45 cents to a possible
$2.84 per pound.
Industry estimates range from a half-million to 1 million
acres of agricultural land likely to be affected by the current California
drought, and between 10 and 20% of the supply of certain crops could be lost.
Just as farmers in the Midwest can shift acreage from
corn to soybeans, we will shift our sources for food. When prices increase,
farmers outside of California, including foreign suppliers, will be incentivized
to ship more crops to the US. That will in turn put downward pressure on costs.
But with water-supply problems expected to persist for years, California
farmers will have some difficult choices to make. They’ll need to determine
which crops should receive the limited amount of available water, and which
should be allowed to fall away. The long term consequences for California
agriculture could be profound.
The cost of growing food accounts for only about 15 cents
of every $1 we spend on it. The rest goes to processing, packaging, marketing
and transportation. Most US consumers are in a position to cope by spending
less on other goods or switching to other types of food. In other words, going
to fewer movies or purchasing less beef and more chicken, the price of which
has risen much less than beef this year. However, nearly 47 million Americans rely
on food stamps, or SNAP – the Supplemental Nutrition Assistance Program, and as
food prices go higher the number of enrollees is likely to climb. And even with
food stamps, many families will find it difficult to provide sufficient
nutrition.
Keep in mind the US enjoys the world’s cheapest food
prices. There are even more significant implications for poorer countries,
where consumers devote a far larger share of personal income to food. Remember
the Arab Spring uprisings started a few years ago with food shortages and
rising prices. Food shortages also figure in the unrest in Venezuela. The US is
the world's biggest food exporter by a wide margin; whatever happens to
domestic prices won't be confined to our shores.
