Why Russians could soon be queuing for bread again

Supermarkets are playing the ultimate 'get out of jail free' card - the poor summer weather - to explain the soaring cost of food. But this problem spreads far beyond flood-prone Britain. And that means grocery bills aren't about to fall any time soon.

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: Sign up for Money Morning

Three cheers for bad weather.

If it weren't for severe weather conditions', South West Trains would never get away with cancelling services in winter. And Gordon Brown wouldn't have been able to duck the question on why the west of England wasn't better prepared for floods in summer, by alluding to weather extremes.'

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Yes the weather, the ever ready get out of jail card for the inept and idle.

And now it's spun its way through the PR machine at Britain's supermarkets. Poor summer weather' is to blame for the huge rise in food prices this year, they've said.

Problem is, when the Russian government starts slapping Soviet-style price controls on everything from eggs to bread, you can be sure it has very little to do with what happened in Gloucestershire over the summer

From Montevideo to Moscow, governments are grappling with rising food prices, and how to deal with them. In Morocco, bakers agreed to stall bread prices during the holy month of Ramadan. The Italians are staging pasta boycotts. And in China, the government is struggling with how to deal with angry student protests in Anhui and Guangdong provinces over rising canteen prices.

We are approaching a global food shortage not seen since the 1970's, as the new Asian middle classes step up their calorie intakes to western levels. For the first time in a decade, China is becoming a net corn importer, as more land is lost to industrialisation and urbanisation. Between 2000 and 2005, the country lost over three million acres of farmland to these twin growth stories. No surprise that last year there was a domestic grain supply shortage of 10 million tons.

Meanwhile, the rest of the world switches more of its farmland over to corn for ethanol production. Last week, the USDA said that global grain stockpiles had dropped to a 26 year low, while US wheat stockpiles were heading to their lowest level in 59 years.

Which might sound strange, given that the US is producing more corn and wheat per acre than ever before. In World War II, it was 39 bushels of corn an acre. Today, it is 155.8 per acre. But last year, 20% of the US corn crop went to the production of ethanol, with output destined for ethanol production expected to double by 2016

And as more farmland is switched from soybeans and wheat to corn for ethanol projects, supplies of soft commodities are expected to fall. Citigroup analysts have already downgraded cereal maker Kellogg (K) because of 'significant commodity exposure, especially to wheat.'

It's been pretty much the same this side of the Atlantic, where families are paying up to £750 more for their food this year than in 2006. Supermarkets have been pushing up prices for some months now. In the 12 months to October 2007, Tesco increased prices 16%, says price comparison website mysupermarket.co.uk. A kilo of peas would now cost you £1.70, up from £1.19 12 months ago. Sainsbury's has raised prices by 11.8%, where a dozen eggs went up in price by 73p to £2.35. Asda follows, with an 8.6% jump.

Packet sizes are reportedly shrinking as prices go up, butter and milk by 18% and 12% in the last month alone, says the Office of National Statistics.

To read more on the rising price of food - and how you can profit from it - see our recent cover story: Why you should buy a farm - or agricultural stocks. Non-subscribers can read this article now by signing up for a three-week free trial of MoneyWeek.

With forecasts of a 20% to 50% rise in the next decade from the Food and Agriculture Organisation - largely due to the biofuels industry - a lot more British wallets are going to get decidedly tighter, even as inflation goes higher, leaving the Bank of England powerless to cut interest rates.

And when that happens, Gordon Brown will need a lot more than a few cloudbursts to get him out of trouble.

And when that happens, Gordon Brown will need a lot more than a few cloudbursts to get him out of trouble.

Turning to the stock markets....

Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email

In London, stocks were heading for moderate gains before a poor start on Wall Street - prompted by worse-than-expected results from Merrill Lynch - dragged them back down again. The blue-chip FTSE 100 index fell 32 points to 6,482, off an intra-day high of 6,550. However, it was a good day for BAE Systems after Lonrho announced an order of 3 planes to its African fleet. For a full market report, see: London market close

Elsewhere in Europe, the Paris CAC-40 lost 59 points to end the day at 5,674, whilst the Frankfurt DAX-30 was 18 points lower, at 7,828.

On Wall Street, the Dow Jones fell over 200 points in early trading after losses at financial giant Merrill Lynch and rumoured trouble at Amazon, along with weak housing data, renewed concerns as to the extent of credit-related damage to the economy. However, the Dow clawed back most of its losses later in the session to end the day at 13,675, just one point lower. In the end, it was the tech-rich Nasdaq which bore the brunt of the selling, falling 24 points to close at 2,774. And the S&P 500 was down 3 points, at 1,515.

In Asia, stocks were mixed today. Japan's benchmark Nikkei index was lower - down 74 points to 16,284 - due to weakness amongst banking stocks such as Mizuho Financial and Sumitomo Mitsui Financial following on from Merrill's poor results yesterday. In Hong Kong, however, the Hang Seng was up 520 points to 29,854

Crude oil extended yesterday's rally today, rising over 1% to $88.10. Brent spot was at $85.09.

Spot gold was on the up again this morning thanks to the higher oil price and market jitters, last trading at $763.60. And silver was also higher, at $13.60.

Turning to the forex markets, sterling was trading at 2.0484 against the dollar and 1.4385 against the euro this morning. The dollar was at 0.7008 against the euro and 114.24 against the Japanese yen.

And in London this morning, the Bank of England suggested that 'public sector intervention' may be necessary for credit ratings firms such as Moody's and Standard & Poor's. The BoE called on firms to publish more detailed information for investors and overhaul the way securities such as collateralised debt obligations were assigned rankings. The Central Bank's comments add to criticisms of rating agencies made by the US Senate in the light of the recent credit market turmoil.

And our recommended article for today...

An investment for the true contrarian

- Sometimes it is possible to spot an investment that is so overlooked, so hated and yet so intrinsically cheap that it really is impossible to ignore. And Merryn Somerset Webb thinks she's found just such an opportunity... To find out what it is, click here: An investment for the true contrarian

What's really been driving oil and gold so high?

- Is it speculation that has driven the oil price above $90 overnight, or is there something more fundamental happening? The latter, says Garry White. In fact, it's down to one of the most basic human emotions: fear. For more on why investors are all searching for a safe haven, see: What's really been driving gold and oil so high?

Jody Clarke

Jody studied at the University of Limerick and she has been a senior writer for MoneyWeek for more than 15 years. Jody is experienced in interviewing, for example in her time she has dug into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.