Saturday, August 21, 2010

The Breakfast Club just got more expensive---That will not go over-easy with customers.

     With the recent egg crisis (salmonella) AND the increase in the cost of major inputs that go into making a large part of my favorite meal of the day, breakfast is likely to become a little more expensive in the near future. The graph below shows the price trend of 3 major commodities--wheat, orange juice and coffee. Food processors/producers/retailers are caught in a bind.  In a recession they find it very difficult to pass on the cost increases to customers which means profit margins get smaller.  Unless they can decrease some other variable cost of production (labor, utilities, insurance, etc) then some could go out of business.  This does not help the employment situation.  Commodity prices do not create much water cooler conversation but when the final goods we consume made from those commodities increase in price, that gets our attention.  So, now you will know the answer when someone asks why the price of breakfast at IHOP went up---Be "that guy" everyone goes to for the answer to all things about economics...
From The Economist:  The breakfast index:  The cost of breakfast rises
"SEVERE drought and wildfires in Russia, the world’s fourth largest wheat producer, have destroyed a fifth of the country’s crop and sent prices soaring. Since the end of June wheat prices have more than doubled. On Wednesday August 4th, the UN’s Food and Agriculture Organization cut its forecast for 2010 global wheat production by 5m tonnes, to 651m tonnes. Kazakhstan and Ukraine, both big wheat producers, have also been hit with dry weather. In Canada the problem is the reverse: unusually wet weather has prevented seeding and destroyed crops. But wheat is not alone. The price of orange juice has also risen recently, probably thanks to bets placed on the likelihood of tropical storms. Coffee prices, which hit a 13-year high, are a result of poor harvests. Taken together, the raw ingredients for breakfast in much of the rich world have increased in price by 25% since the beginning of June."
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