Zero Hedge reader Jason submits the following rebuttal to yesterday's most hilarious segment on CNBC, which was Steve Liesman's explanation of how a 100% jump in wheat prices is really nothing to be concerned about.
CNBC, their stooge Liesman, and a whole gallon of "Inflation Doesn't Exist Except in your Nightmares" Kool-Aid.
I viewed CNBC on Monday morning and was amused at the attempt to convince consumers Moms and Dads on a budget who buy groceries) that a 50% increase in wheat will not impact their grocery budget. The logic used (see the story as recorded by CNBC) is beyond ridiculous to the point of incompetence. Anyone who actively listens vs. passively dozing off, and I know that is hard to keep from doing, would have seen right through this. CNBC has disarmed their comments so I am sharing with the ZH. Here is the video of the story -> http://www.cnbc.com/id/41235346
Here is the real story. I used CNBC's data on the costs and increases of a bushel of wheat, a 25 lbs. bag of flour, and a loaf of bread.
What a bushel of wheat costs:
1 bushel of wheat is up from $5.00 to $7.50($2.50 or 50% increase).
One bushel of wheat yields approximately 42 pounds of white flour.
One bushel of wheat yields approximately 60 pounds of whole-wheat flour.
((42+60)=102)/2 = 51 lbs. which is about 2 @ 25 lbs. bags of flour.
So a $2.50 increase in a bushel of wheat results in a pass through inflation of $1.25 per 25 lbs. bag of flour. This is a great increase in margins for the wheat farmer (assuming fuel and equipment costs did not increase or any other raw materials like seeds or fertilizer).
What a 25 lbs. bag of flour costs:
Flour is up from $7.00 to $8.10 (up $1.10 or 13.6%).
Not all of the $1.25 inflation in the bushel of wheat got passed through in the price of flour. Of the $1.25 per bag that should have been passed through only $1.10 was passed through. This means the flour producers had to take a $0.15 (15 cents) hit per 25 lbs. bag. This came out of their profits while passing along $1.10/$1.25 or 88% of the cost increase. Not so good for the flour maker. This is what you call margin reduction. It might actually be worse if we factored in fuel costs, labor costs, and fuel price increases. Again the flour producer took that hit as well.
What a loaf of bread costs:
A bushel of wheat makes 42 loaves of white bread
A bushel of wheat makes 90 loaves of wheat
So let’s average out the production to be (42+90)/2 = 66 loaves of white-wheat bread per 50 lbs. of flour.
If a bushel of wheat produces about 2 @ 25 lbs. bags of flour then each 25 lbs. bag would produce about 33 loaves of bread.
An increase of $0.10 per loaf results in a total increase of $3.30 of real dollar inflation to the consumer for their next 33 loaves of bread. This means $6.60 for their next 66 loaves. So the original bushel of wheat now costs the consumer (you and me) and additional $6.60.
This means that for the 2 @ 25 lbs. bags of flour the baker had to pay an additional $2.20 for, she actually netted a total of $6.60- $2.20 = $4.40. Really good for the baker (again assuming all her costs are fixed and did not increase - fuel, labor, power bill, water).
The Moral of this story:
Just because the cost of wheat increase 50% doesn’t mean that the corresponding increase in bread should also be 50%. The reason is that a bushel of wheat makes a whole lot of flour which makes even more bread. A much smaller increase in each loaf(66 total) of bread aggregates to a much larger hard dollar increase for consumers. In this case a $2.50 increase in a bushel of wheat actual manifests itself as a $6.60 increase to consumers. Did they honestly think that bread should have increased by 50% like a bushel of wheat?
Bottom line: The cost of bread went up proportional to the cost of wheat. Not dollar for dollar but proportionally.
Now remember, wheat is used in a lot of products. Not only will you see an increase in bread but a similar analysis could be done on any of the following: pasta, cereal, crackers, cakes, pastries, all kinds of sauces and spices. The list is too long to list here but this is a good resource
So if everything that is made of wheat went up in price as did bread, then a dime here and a dime there adds up to real cost inflation to consumers. We are seeing it in prices at the stores but it seems no one with a media platform wants to discuss the truth. I don't pretend to have done much research on this and it actually took me less than 1 hour to dig all this up using a few select search terms. Why won’t the press tell the whole truth and stop pretending?
Mark Twain said there are "Lies, Damned Lies, and statistics". Statisticians and Economists are not terribly different in their bending of numbers to make their case. I am not sure if CNBC is a willing conspirator in trying to convince the American consumer that "all is well" or if they are simply incompetent. I do know, however that neither is a good thing. This story should be retold on CNBC using the complete facts and the motto from the economists at CNBC should not be "if you can't dazzle them with brilliance, then baffle them with bullshit." I, for one, have grown weary of being shat upon.