Bloomberg's "Chart Of The Day" Warns Of Coming Surge In Wheat, Corn Prices

Now that the Chairman's new mandate is not to prevent disinflation but to generate inflation, he may soon be patting himself on the back... but for all the wrong reasons. As the Bloomberg chart of the day indicates, the world may very soon see a surge in wheat and corn prices, pushing such staples as bread and corn flakes through the roof. The reason, in addition to Bernanke's flawed monetary policy: "bad weather and a shortage of farmland threaten to create supply shock waves." As the chart below shows the price of a basket of grains and palm oil has risen almost 50 percent since the 50-day moving average passed through the 100-day line. On the two previous times this occurred the past decade, prices about doubled or tripled over the following two years before peaking. In other words, if history is any indicator, we may see a quadrupling of input prices from here as the last "food inflation" bubble is recreated. Are double digit prices for a loaf of bread in the immediate future for what will soon be a hungry US middle (what's left of it), and not-so middle class? Quite possibly. Luckily, all their stock gains should more than offset this upcoming price shock. Or not.

More from Bloomberg:

Drought in Russia and other parts of Europe, excessive rains in Canada, dry weather in the U.S. and flooding in Pakistan prompted the UN Food and Agriculture Organization to pare its harvest estimates. The agency forecast a 37.4 million metric ton shortfall in grains production for 2010, which would be the first deficit in at least three years. Global production of grains will be 2.216 billion tons this season, compared with demand of 2.254 billion tons, the FAO said last month.

“Our main concern is the low level of stocks,” Abdolreza Abbassian, secretary of the trade markets division of the agency’s Intergovernmental Group on Grains, said in a phone interview from Rome. “We don’t have enough buffer in the event of a major shortfall in production next year.”

After October and November saw a series of basic staples opening limit up on the commodity exchanges, it appears that the recent brief respite of price moderation may soon be coming to an end:

Wheat futures surged to the highest in almost two years on Aug. 6 after the worst drought in at least half a century slashed grain harvests in Russia, prompting livestock feed users to switch to corn. Demand for that grain rose as a result, while dry weather threatened to curb yields in the U.S., the world’s largest producer, and hamper planting in South America. Corn prices have risen about 70 percent since this year’s June 7 low.

“These are symptoms of having tight markets for nearly all the major food crops, the result of which is that whenever any of them has a problem, you will see spillover with the others,” Abbassian said. A further boost in demand “could find the stocks at even a tighter situation. That could really send shock waves throughout the sector, starting with corn.”

As to what this means for retailers who will be even more hard pressed to find ways to squeeze every penny out of margins, and not pass through costs, just look at the rather unfortunate case study of GAP, which filed for bankruptcy a few short hours earlier.