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$50 dollar pizzas anyone?
Posted by: McQ on Wednesday, March 19, 2008

There was a story today in the AJC about Delta airlines and increasing fuel cost:
Delta President Ed Bastian emphasized that the airline will do what is needed to offset jet fuel costs now expected to be about $900 million higher than was projected earlier this year.

"We're reducing capacity. We're going to get the costs out of the system," Bastian said in an interview. "Unfortunately, there's a need to reduce the work force by about 2,000 employees."
Of course most people know the reason for the rising fuel costs has to do with more demand for an increasingly scarce resource with no satisfactory alternative available. And those same people know that this sort of a rise in one commodity usually means the price of others will rise as well.

Take one of the main commodities necessary to make a simple pizza - wheat:
The thick and thin crust creations at Ciro's Pizza Café wouldn't measure up without good flour and cheese, so Rob Marvin grits his teeth and pays the record prices being charged for them.

He spends $469 a week on flour alone, up from $156 six months ago. Next month, he predicts the tab will grow to $625 a week. So far, he hasn't dared to raise prices out of concern that he'll lose business to rivals.
A 300% increase in six months? So we know, given the Delta story, that part of that cost has to do with the increase in transport costs. But 300% increases? What on earth could drive that? Certainly not just the cost of fuel. There has got to be some major level of scarcity to see that size of an increase in good old wheat. We've grown it for centuries, we export it, how in the world can it be in that short of supply?

Oh:
The wheat is being bought to feed not only people but also poultry, cattle and dairy cows.

While demand has surged, supplies are down. U.S. farmers have been growing less wheat, opting to plant corn and reap government incentives meant to ramp up the nation's ethanol supply. At the same time, wheat farmers in other parts of the world have brought in poor harvests, and the cost of getting wheat to market has soared because of rising fuel prices.
So let's see - if corn were left to be grown for food and fodder, wheat farmers would probably be planting the same number of acres as they have in the past, and that would mean that even with poor harvests elsewhere wheat and corn prices would most likely be fairly stable reflecting mostly an increase in fuel prices necessary to deliver them to market and a slight scarcity due to the poor harvests elsewhere.

Instead we have 300% (and probably more) increases in the price of wheat because the government is playing with the commodities markets.

I'm telling you those government ethanol "incentives" don't seem quite so wonderful when you're contemplating $50 dollar pizza, do they?
 
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And you expect politicians will know the difference. From what I have seen recently, they don’t blink an eye for paying $5500 for a hooker. So, what’s the big deal for them about a $50 pizza?
 
Written By: SShiell
URL: http://
From what I have seen recently, they don’t blink an eye for paying $5500 for a hooker. So, what’s the big deal for them about a $50 pizza?


Oh my God. The perfect night for just $5600.
 
Written By: Is
URL: http://
10-20% of gasoline is ethanol already.

A lot of industrial/farm vehicles have been on ethanol for decades already.

Those uses combined are still much more than ethanol used as in E85 in personal vehicles.

It would take 1/10th to 1/5th of car running E85 all the time to match the ethanol consumed in gas alone. Its not anywhere near that.

I’d guess that a 300% increase in the price of wheat, if it was at the farm level, probably beats any government incentives on corn.

So I’m not convinced its demand for corn that’s driving that 300% unless the commodity prices have been grossly exaggerated by roulette grade speculation.

 
Written By: jpm100
URL: http://
The Mexicans have been noticing their equivalent of "$50 pizzas" for a while now.

Oh, and beer drinkers too.

 
Written By: KipEsquire
URL: http://www.kipesquire.com
This is only partly correct. Yes, the ethanol situation has wreaked havoc with our commodity prices, but a good part of it is irrational trading on the part of speculators. For example, one week, wheat went from $20 to $25 a bushel - that’s 25% in a week! With the dysfunctional capital markets (primarily in the credit markets, but also in the stock and commodity markets), nothing is entirely rational. Some traders are saying that the world economy is still growing, some are saying it’s an inflation hedges, etc. When it comes down to it, traders are really just driving prices through speculation.

The price of oil and gold have skyrocketed, partly due to a weaker dollar, but also partly due to speculation (and partly due to out-of-whack inflation expectations).

Whether rightly or wrongly, there is a temporary dislocation of prices that should correct to a large extent by itself. (Whenever one bubble pops, another one is created somewhere..Internet stocks, houses, credit, commodities,...)
 
Written By: Richie Rich
URL: http://bizblogger.blogspot.com
When it comes down to it, traders are really just driving prices through speculation.
And what do you think is driving speculation enough to see prices such as those noted above?

It’s certainly not just fuel prices. We’ve had spikes in that before with minor effect on commodity prices. It can’t just be the bad harvests - we’ve seen those before as well with little effect on price. Even the combination of fuel and bad harvests have a history that is nothing near 300% increases. The only new thing added is the drive toward large volumes of ethanol and the fact that it is paying off big in government incentives (big enough that ethanol shipments from other countries are shipped here long enough to collect them before they are shipped to a final destination).

Stands to reason that when you consciously use one food commodity for something other than food (corn), and you subsidize growing it for that purpose to the extent that it pays considerably better than the wheat you’re growing, you might decide for the better payday by planting corn. You’ve now removed more acreage from food production. Less acreage, of course, means less wheat. Add in fuel and bad harvests and prices go up fairly dramatically, speculation or no speculation.

Corn, soybeans and wheat prices are going through the roof. Two of the three are the main ingredients in ethanol and bio-diesel. The other is just being squeezed because it is more profitable to grow the other two. While there is certainly speculation involved, the bottom line is there are less corn, wheat and soybeans available for human and animal consumption in total, and that drives their price up.
 
Written By: McQ
URL: http://www.QandO.net
McQ: Part of driving speculation is that the world’s getting so damn wealthy.

All that money wants to be invested in things, and enough of it is being pushed around by people convinced "commodities" are the best return that things like this can happen.

(That seems the only explanation for the insane price of gold these past years; a huge pile of money all over the world chasing it as something "risk free". And once it starts rising, it’s, well, rising, and that attracts more. Might even end up being a bubble itself.)

(I still think your explanation for wheat prices in specific is powerful and probably more to the point than "spectulation" - that and that, as you said, there have been less-than-stellar wheat crops in various parts of the world.)

I’m with Richie that this speculation is not strictly harmful (it is, of course, indistinguishable from "investment" and normal capitalist price signaling, at the theoretical level) and is also self-correcting, but it does make things interesting as it goes on.
 
Written By: Sigivald
URL: http://
Whoops have to correct my numbers. Gas currently ranges only 5-10% ethanol. Still, there’s far more ethonal sold as gasoline than as E85 for personal use.
 
Written By: jpm100
URL: http://
"And what do you think is driving speculation enough to see prices such as those noted above?"
The rotten dollar, and people getting out of it and into anything else.
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
The wheat is being bought to feed not only people but also poultry, cattle and dairy cows.
If you are not a vegetarian, you are anti-environment. People and things may need to travel, but people don’t need to eat meat.

 
Written By: mkultra
URL: http://
I just raised prices for my customers by 20% this week due to surging steel prices. Iron ore prices went up 65% last month and the effects are echoing through the steel market.

What really sucks is I use the steel in furniture which is already a messed up market due to the housing bust. Usually a recession means costs come down, but not in this case.
 
Written By: Harun
URL: http://
mkultra,

Your vegetables have to travel, too.

I guess you avoid fruit in winter?

Also, the best diet for the environment is one of legumes and free range beef. It has the least impact.
 
Written By: Harun
URL: http://
mkultra,

Your vegetables have to travel, too.
I know. That’s why I said this:
People and things may need to travel ....
Also, the best diet for the environment is one of legumes and free range beef. It has the least impact.
Ha ha ... free range beef for everyone!
 
Written By: mkultra
URL: http://
MK,

You might find this funny...its where I got the Beef/Legume meme.

http://www.thebestpageintheuniverse.net/c.cgi?u=grill

But I think the link within that page is dead.

 
Written By: Harun
URL: http://
Like I’ve been saying right along....It’s called "Alternative fuel" for a REASON, people. It’s not up to the task of being our energy mainstay, but it’s a nice to have.

Now, were we to have an alternative FOOD... we MIGHT get away with using food for fuel.

 
Written By: Bithead
URL: http://bitsblog.florack.us
A look at human teeth clearly indicates that humans are omnivores and are intended to eat meat. It’s what nature intended.
 
Written By: Loren
URL: http://
A major development in the evolution of man was the intorduction of meat (protein) into the diet - enhanced the development of the mental processes consistent with the evolution of Homo Sapiens. The lack of this protein in the diet would have stagnated the evolutionary development of man to that of the higher apes.

But I guess to a vegetarian, that would be a good thing.
 
Written By: SShiell
URL: http://
If we’re not supposed to eat animals, then how come they’re made of meat?
 
Written By: Billy Beck
URL: http://www.two—four.net/weblog.php
I would be more interested in what Mr. Marvin pays per pound of flour. Am I also to assume that he uses the same amount, of the same type, from the same supplier, etc?
 
Written By: timactual
URL: http://
If we’re not supposed to eat animals, then how come they’re made of meat?
Billy, I gotta tell you, that was one of the best lines I have ever read - anywhere! I am still laughing!
 
Written By: SShiell
URL: http://

 
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