Monday, July 23, 2012

Will the Grain Complex's Price Spike Lead to Recession?

NDD has written extensively about the oil choke collar.  However, does the same hold true for food prices -- and, more specifically, grain prices?  This is an important question to ask considering the latest run-up in the grain complex.

So -- let's look at the data.  Unfortunately, the FRED system only has a long series of non-seasonally adjusted numbers for the cereals and baked goods component of the CPI.  These numbers go back to the late 1930s.  The seasonally adjusted numbers go back to the 1990s.  So, the numbers we'll use going ahead will be the NSA numbers.

Here's the long series, going back to the mid-1930s.  We can break this chart down into two periods; pre and post 1974.

Before 1974 we see several large YOY percentage spikes in prices that didn't lead to a recession.  These occurred in the early-1940s and the early 1950s.  In addition, there is a somewhat large spike in the late 1960s that was not followed by a recession.  There are three spikes -- the first in the late 1940s, the second in the late-1950s and the final at the beginning of the 1970s that were followed by a recession.  So, in the pre-1974 era, there is a 50/50 chance a large YOY cereal and bakery price spike would proceed a recession.

However, starting in the early 1970s, we see that large price spikes were far more likely to occur before a recession.  On this graph note that in the early/mid 1970s we see a YOY spike of over 30% that presaged a recession.  A smaller spike of nearly 10% occurred before the 1980s double-dip recession.  A spike of nearly 10% occurred before the early 1990s recession (where we also had an oil price spike).  Finally, there was a large YOY run-up before the last recession, that continued into the recession.

Let's look at the more recent data in more detail.

The above chart shows that before the 1974 recession, the YOY grain price spike was nearly 20%, which helped to create the 1974 recession.  In addition, notice the nearly 13% YOY price spike that occurred before the 1980 recession.

The above chart shows the remainder of the data.  Note the large spike before the second dip of the early 1980s double-dip recession, along with the over 6% spike before the early 1990s recession.  Finally, a near 5% spike occurred before the last recession -- a spike which continued to increase into the recession.  Also note the nearly 5% run-up that occurred just recently, which occurred as the US economy was slowing down.

Put another way, since 1974, a year over year percentage change of 5% or more in the cereals and bakery component of the CPI has occurred before every recession.  That's not a comforting thought when you consider these charts: