Now that the food crisis is in full swing, I want to write about what happens next. Before hyperinflation begins in America, the US consumer sector is going to experience economic disintegration, crushed out of existence by two competing forces: skyrocketing costs and weakening demand. This process has already begun!
1) The Inflationary force: SKYROCKETING COSTS
The inflationary force that has begun to devastate the US consumer sector is skyrocketing costs. The article below gives a good overview of process.
The Business Spectator reports about Nike's run-away China costs.
Nike's run-away China costs
Published 8:00 AM, 23 Dec 2010 Last update 10:12 AM, 23 Dec 2010
Australia may be benefitting mightily from surging commodity prices, but we, along with other developed countries, ARE ABOUT TO BE HIT WITH HIGHER PRICES FOR MANY OF OUR IMPORTED CONSUMER GOODS.
The share price of the Nike Inc, the giant sporting clothing and footwear group, suffered its biggest drop in more than two years yesterday after the company warned that its profit margins were likely to be come under pressure in coming months.
In a conference call after the US market closed on Tuesday, Nike's chief executive, Mark Parker, told analysts that "as supply and demand find a new normal in the recovering economy, OUR INDUSTRY IS GOING TO EXPERIENCE MARGIN PRESSURE DUE TO RISING INPUT COSTS."
He signalled that costs for commodities such as cotton, as well as labour and transportation costs, had increased in recent months and would soon impact Nike's bottom line.
Shares in other sporting apparel companies also lost ground, as investors worried about the triple whammy of higher cotton prices, rising combined with rising labour costs in China and higher transportation costs.
Cotton prices have soared to record highs in recent months due to heavy buying from China, the world's largest importer, at the same time that Pakistan's cotton crop was devastated by the worst flooding in the country's history.
The higher cotton price is causing shudders through the textile industry. Analysts said that some manufacturers, such as Nike, were choosing to absorb most of these higher costs, rather than passing them on in the form of higher prices to consumers.
But they estimated that manufacturers and importers of lower-priced goods such as T-shirts and underwear would have little choice but to increase prices.
At the same time, many multinational companies that have relied on China as a source of abundant, cheap labour have found their wage bills have risen sharply this year.
In response to a spate of suicides at its sprawling factory complex in southern China, the giant electronics contractor, Foxconn — which manufactures products for companies such as Apple, Dell and Hewlett-Packard — offered a 30 per cent wage rise to its 800,000 workers.
Industrial disputes also stopped production at a range of major Chinese plants, including those of Honda and Toyota, and workers won sizeable pay rises. As a result, LABOUR COSTS IN CHINA'S MAJOR COASTAL MANUFACTURING HUBS HAVE SOARED BY BETWEEN 20-25 PER CENT THIS YEAR, which has increased the cost of Chinese-made products.
The third factor hitting multinationals is the increased cost of transportation. These pressures show little sign of abating, with crude oil futures rising above the key level of $US90 a barrel overnight. Many analysts believe that oil prices could rise above $US100 a barrel next year, due to declining global inventories and growing demand in the US and China.
Why the inflationary pressure will continue to worsen:
1) A simple look at the supply/demand situation in major commodities, especially food, shows that prices still need to head higher.
2) As nation around the world sell their foreign reserves to lower food prices, the dollar will fall, further driving up commodity prices. The revaluation of the yuan alone will boost commodity prices at least a further 10 to 20 percent.
3) Chinese manufacturing sector (to a lesser extent) is undergoing the same process as the US consumer sector. Just like how US retailers are absorbing costs instead of raising prices, Chinese manufacturers have been doing the same, which is offering US retailers a temporary reprieve. However, as Chinese Manufacturers continue to go out of business through 2011, the survivors will raise prices, passing on all these pent up costs.
2) The deflationary force: FLAT DEMAND
The second force that has begun to devastate the US consumer sector is flat demand (see There Is No Recovery). This is preventing retailers from raising prices, which is crushing profit margins.
A huge number of Americans are surviving day-to-day on what amounts to fixed income. Social security payments have remained unchanged over the last two years. A record 42 million people are on food stamps.
The growing number living off unemployment benefits and temp jobs simply don't have more money to spend more on groceries or consumer goods. As a result, retailers are, for now, being forced to absorb higher costs and are becoming unprofitable.
Despite deflationary pressure, prices will (after enough carnage) go up
Unprofitable stores go out of business, and each store which closes makes it easier for the survivors to raise prices. No matter how weak consumer demand gets, once enough retailers go out of business, prices can go and will go up to reflect higher costs.
Why the deflationary pressure will continue to worsen:
1) Substantial layoffs by state and local governments due to their mounting financial woes will put millions out of work.
2) The shrinking of the US consumer sector will put millions more out of work.
3) The collapse of treasury market and financial system (see *****Food Riots and the Mass Liquidation of Foreign Exchange Reserves*****) will also put millions out of work.
CARNAGE ALREADY CLEARLY VISIBLE IN AMERICAN GROCERY STORES
The Delaware Online reports that food prices up, but consumers' spending remains flat.
Oversupply, increasing costs put strain on grocery stores
FOOD PRICES UP, BUT CONSUMERS' SPENDING REMAINS FLAT
By AARON NATHANS — The News Journal — January 16, 2011
Amid increasing competition and operational costs, Bear lost its Safeway on Saturday, and market forces threaten to do further damage to the region's grocery stores.
The closure of the store, which opened 15 years ago and was smaller than its younger competitors in the area, comes amid CONSIDERABLE TUMULT IN THE GROCERY INDUSTRY.
Higher food commodity prices, higher energy and labor costs and a saturation of supermarkets in some areas is taking its toll on the stores, which are used to operating on small profit margins, industry officials say.
According to the national Food Marketing Institute, sales at grocery stores were relatively flat in 2009, after a decade of growth. Slightly less than half of supermarket retailers sold less in 2009 than they did in 2008, and 52 percent reported sales gains below the rate of inflation.
Grocers are worried about consumers' increasing willingness to travel from store to store looking for the best deals, the group reported. …
They are also increasingly concerned about food inflation, as commodity prices began rising in June, threatening to either cut into stores' profits or force them to raise prices in 2011.
THE PROFIT MARGIN FOR RUNNING A SUPERMARKET IS STAYING THE SAME OR DECREASING, EVEN AS THE COST TO RUN THE STORE GOES UP, Wenger said. THE STORES CAN'T EASILY PASS ALONG INCREASES IN COMMODITY PRICES IF THEY WANT TO REMAIN COMPETITIVE, she said.
People will spend the same amount of money at the supermarket, no matter whether a store raises its prices, she said. They will just be a little more picky about what they buy, she said. Everyone is still looking for ways to save money, she said. "Consumers shop to what their disposable income is."
MARKET FORCES HAVE MADE A VISIBLE IMPACT ON THE GROCERY LANDSCAPE. Great Atlantic & Pacific Tea Co. owns A&P; stores as well as a number of chains, including Pathmark, which operates in Delaware. The company filed for bankruptcy protection last month. In August, the parent company said the Delaware stores were safe from a list of 25 stores that were expected to be closed. The company did not return a call on Thursday.
Meanwhile, Acme's parent company, Supervalu Inc., announced earlier this month it would CLOSE FIVE UNPROFITABLE STORES IN THE PHILADELPHIA REGION BY FEBRUARY'S END -- two in Pennsylvania and three in southern New Jersey.
"If they haven't been that fast, responsive to change, they're going to go out of business. THERE'S JUST SO MANY FACTORS RIGHT NOW THAT ARE CLOCKING GROCERS," Peterson said.
In Safeway's case, THE CHAIN HAS BEEN CLOSING UNPROFITABLE STORES, …
About half of the Bear Safeway's 60 employees were placed at other area Safeway stores, Eyck said. THE REST LOST THEIR JOBS, he said.
Courier Press reports that Boonville, Ind., Buy-Low closing its doors.
Boonville, Ind., Buy-Low closing its doors
By Carol Wersich
Originally published 01:19 p.m., January 25, 2011
Updated 01:19 p.m., January 25, 2011
BOONVILLE, Ind. — Buehler's Buy Low has been a mainstay in Boonville, Ind., for many customers the past 22 years.
Located on the edge of town at 930 W. Main St. — in Cypress Shopping Center — the store draws shoppers from Warrick County and neighboring communities.
The management has strived "to offer great services and products and to make the operations as efficient as possible," said Craig Knies, division manager for the Jasper-based Buehler Foods.
But, RECENTLY, THE BOONVILLE LOCATION HAS NOT GENERATED ENOUGH REVENUE TO JUSTIFY ITS EXISTENCE.
SO, THE STORE WILL BE CLOSING, Knies said.
When asked whether the new Walmart, located just down the highway from the Boonville Buehler's, was hurting the Buehler's sales, Knies said "NO. THERE'S BEEN NO COMPETITIVE CHANGE. WALMART ALSO HAS BEEN HERE FOR A LONG TIME."
Conclusion: Soaring food prices don't mean American grocery stores will raise prices. It means that a huge number of supermarkets are going to go out of business. Only after the carnage and store closings will the survivors raise prices.
The economic disintegration of America's consumer sector has begun.