Two quotes, from two sources ... they seem to be saying contradictory things to me. If you want to play along for a few minutes, follow me ... but remember, I am not an economics whiz and that’s where we’re going for a spell.
First, the two quotes. I’ll reveal sources and provide links in my comments afterward.
"Usually, when prices are rising, it's an advantage for the retailer," said Ron Paul, founder and president of food industry consulting firm Technomic. "With rising inflation, the middle man and the retailer tend to benefit."
Transcripts of some grocery chains' recent earnings reports ... reveal executives' positions on the topic.
Rodney McMullen, vice chairman of Kroger Co., which operates chains such as King Soopers: "In our view, periods of modest inflation is a positive for our business because inflation tends to improve sales, increase margin dollars, and create greater leverage of fixed costs."
During the third quarter, Kroger's sales climbed 9.8 percent and its income jumped 18.2 percent.
Steven Burd, Safeway's chief executive officer: "I think things will begin to settle down in '08, and I think that consumer packaged goods companies -- and we -- are both very in tune with the demand dampening effects that passing these things along can have. At the same time, when you push the numbers, as a retailer you would absolutely pass them along; it is better for you."
In its third quarter, Safeway recorded sales that were 3.9 percent higher and a 12 percent rise in net income.
Whole Foods Market's CEO John Mackey: "We've been doing this for 29 years and every time there is a recession our sales don't fall, in fact ... they increased during the recession."
The second is harder to excerpt, because it’s part of an interview, but here ’tis:
Agriculture is the best place – one of the few places – where I would put money in the investment markets right now. I’d buy agriculture. .... Agriculture’s still extremely depressed on a historic basis. There are very sound and strong fundamental changes taking place for the better. ....
[From a later answer] What’s gloomy? .... I told you if you’re a farmer, you’re about to get rich.
Okay, so maybe that isn’t entirely contradictory, especially if one believes in the “rising tide” metaphor for markets. And perhaps I’m somewhat blinded and/or jaded, but farmers getting rich? We’re out in the middle of farm country, in a mostly rural state; and when we travel, we travel through a lot more farm country. There’s been a lot of stories in the news regarding crop prices going up, corn and wheat chief among them; but I have yet to see that translating into signs of wealth anywhere in farm country. So, even though I think Jim Rogers—the person speaking in the second quote (full text is at Jim Rogers Interview: Where to Put Your Money)—might be right about the general trend, I don’t think farmers are going to be getting rich, not in the USSA anyway.
Part of the reason is alluded to in the first quotation, which is from the article titled The rising cost of groceries. I think a lot of the money isn’t going to the producers, but rather to those higher up the production–distribution chain. Of course, when the price of a grain rises, that means whoever’s selling the grain will get more money ... but I wonder how that actually works. Do farmers sell their grain to co-ops and the storage places, so that when the price jumps those guys reap the benefits? Or do they pay storage fees and actually get the benefit themselves? Anyway, even if we were to assume that farmers are seeing a lot more green for their grain, family farmers most likely have a lot of debt or other obligations (like property taxes) that will suck away a lot of those FRNs. Agri-businesses—those giant corporations—may see profits rise, but does anyone really view them as “farmers”? To me they’re part of the corporacracy, and therefore part of the problem that has pushed family farming into its tenuous position. For all of them, the value of the dollar is falling, and will continue to fall as long as Helicopter Ben keeps the printing presses churning and interest rates dropping. That doesn’t help anyone who’s essentially stuck using the USD to get rich.
All this doesn’t mean, though, that enterprising individuals can’t do well in the agriculture sector. I’m just not seeing it happen in the way Rogers apparently sees it. First, simple gardening and/or subsistence animal husbandry can be an excellent return on investment. With a little capital and a fair amount of sweat, instead of paying ridiculous prices for inferior quality at the supermarket, one can have an abundance of healthful food. Excess can be sold at a roadside stand or farmer’s market, bartered, or preserved for use in the off season. Then, the money that would have gone to veggies or eggs or butter can be put to other uses—purchases that can’t be avoided, or other investments that will work to one’s benefit. That seems to me to be the best way to approach rising food costs. How I’m going to accomplish it this summer is going to be an interesting challenge, but I intend to give it a go.
Right (and wrong)
Or I guess it depends on what Rogers means by "farmer". He seems to use two contradictory meanings in the interview. First of all he said that he is buying agriculture, that it is one of the few things he is long on. So far so good. I happen to agree with him on this. Some good agriculture stocks or an agriculture ETF could have very good returns over the next few years. Later he said that farmers were going to get rich and that there are a lot more farmers than Wall Street bankers in the world, implying that small farmers were going to do well. He seems to be confusing things. Small farmers and commercial agri-businesses (even small ones) are very different creatures. Agri-businesses will do well, in fact are already doing well, in the "new" economic environment we face. The small farmer is probably going to get screwed even more as the rising cost of inputs (fuel, animal feed, fertilizer, etc) drives more of them out of business (Captain Tractor comes to mind). Additionally, the larger firms will get subsidizes from their respective governments.
That having been said, a small farm which deals mostly in the local market place may prosper. I'm not sure how farmer's markets work in the US. I recall when I lived in NYC over 20 years ago that every Saturday farmers from the surrounding areas, some as far as 200 miles, would come and sell things in Union Square Park. So the local market may in fact be quite large. Here in Costa Rica every town has a "feria" on either Saturday or Sunday. Judging from the traffic and activity, it seems that those who sell produce and other agricultural products make a fair bit of money. I do not think that anyone who sells at the ferias is getting rich, but I believe that they are living comfortably.
With regard to the the first quote, from what I understand, in Costa Rica, the small farmers do not sell directly to the supermarkets. The products go through many hands before they reach the supermarket shelves. When they sell to the co-ops they get a lot less than what they get at the feria and the feria prices tend to be 50% - 70% of what the supermarket charges. So there is a huge mark up, to which I'm sure inflation contributes.
If agriculture is not your business, subsistence farming makes a lot of sense. It does not have to take a lot of time and effort. I recently saw a 45 minute video on Forest Gardening and Permaculture based on the book "Forest Gardening, Cultivating an Edible Landscape" by Robert Hart. I was impressed by the video and bought the book. Highly recommended. But a word of warning, you have to get past (or ignore) all the eco-babble, anti-western culture and medieval romanticism rants to get at the great information. We are in the process of setting aside some land to experiment with these methods. BTW the video is floating around on bittorrent sites.