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Brand pricing and agflation

May 15, 2007

It might help the environment, but ethanol is wrecking havoc with food prices. Ethanol production is expected to take 27% of the US’s corn crop, taking corn out of the food supply chain and pushing up prices.

Back in February, Influx warned readers about this trend.

Hershey recently announced that its under financial pressure from rising corn prices. It doesn’t directly use corn in chocolate, but it uses lots of dairy product, for which costs are rising, because cattle are fed corn.

Restaurant chain PF Chang’s highlighted the impact of rising corn prices on overall food costs, in its recent presentation to investors.

Corn Price Trends
Impact of Rising Corn Prices

This phenomenon has led Merrill Lynch’s Chief Investment Strategist, Richard Bernstein to coin the phrase “agflation”.

“Food prices are rising, putting upward pressure on producer and consumer inflation. We call this phenomenon “agflation.” Given the expanding constraints on food supply, the changing demand for food and the entrance of the energy business as mass consumers of food products, it is not surprising to see food prices rapidly putting upward pressure on overall inflation

Agflation is bad news for the consumer, who is already under pressure from higher energy prices. For the food companies, however, it could be good news as many companies have been able to pass along those higher costs to the end user.”

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