First came Peak Oil - now are we facing Peak Milk?

Shortages caused by the wet weather could see consumers paying up to 3p more on a pint of milk. But milk isn't the only foodstuff getting more expensive - and this problem won't disappear with the flood waters.

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"Consumers face price increases of 3p on a pint because of a shortage caused by the wet weather," says Valerie Elliott in this morning's Times.

Now it's not exactly a headline-making crisis of Peak Oil proportions, but make no mistake this is a structural change that you're going to be hearing a lot more about in years to come.

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Milk and plenty of other foodstuffs are all getting more expensive. And unfortunately, this problem won't just disappear with the flood waters

Prices of milk in the UK are rising after First Milk, Britain's largest dairy co-operative warned that it won't be able to fulfil its supply contracts, because of a slump in milk yields this summer.

The problem's been caused by the wet weather forcing farmers to keep their cows indoors, which reduces the amount of milk they produce. The amount produced per cow per day has averaged 17-18 litres over the past two months, from a more usual average of 20 litres.

So it means a shortage of liquid milk which will push up prices for supermarkets and retailers. But why worry, you may ask? Just like the floods, this is a short-term blip it'll go away. Surely the supermarkets can absorb the pain in the meantime?

But while the supply problem may well ease up as the weather improves, demand pressures aren't going to go away.

You see, it's not just the UK that's having problems. Consumers in East Asia aren't just driving up prices of metals and oil they are also driving up demand for foodstuffs, or soft commodities. As people get richer, they tend to eat more calorific food, including more meat, and more dairy produce.

This demand surge is being felt across the world. US ice cream makers are hiking prices, for example. And it's not just happening in the milk sector. In the States, food prices rose by 7.3% in the first quarter alone. On top of the boom in Asia, the drive for alternative fuels, and corn-based ethanol in particular, has pushed the price of corn higher. As the price rose, so farmers have planted up more corn, which squeezes the land available for other crops.

Now the surge in corn planting has seen the price of the crop level off somewhat, but even so, higher corn prices mean higher feedstock prices. And that makes cows, pigs and chickens more expensive to feed and maintain, which in turn makes their meat more expensive. And of course, rising energy costs also make it more expensive to run a farm, putting more upward pressure on prices.

As Elliott says: "Insiders believe the era of cheap food in Britain is coming to an end, and that they [retailers] will have to pass on increases to customers in the autumn."

If you want to read about how you can invest in the companies that might profit, have a read at our cover story from May: Harvesting profits

We also look at the dairy sector specifically in this week's issue of MoneyWeek, which is out on Friday.

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Of course, it goes without saying that this inflationary pressure is coming just at the wrong moment for a world economy grappling with the consequences of too much debt being dished out too carelessly. Just at the time when many investors would like to see an interest rate cut, central banks will be coming under pressure to push them higher.

In fact, Doug Williams of the Centre for Economics and Business Research reckons that the official consumer price index inflation measure may even breach the Bank of England's upper limit of 3% later this year, which would force Mervyn King to write his second letter to the Treasury.

It's yet another good reason to hike the base rate this Thursday. We suspect that while rates will probably remain on hold, given the fear currently rattling through the markets, the vote will be closer than anyone currently believes.

Turning to the wider markets

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After a volatile day's trading, London's blue-chip index ended the day in the red despite a jump of over 7% for chemicals company ICI. The FTSE 100 was 9 points lower, at 6,206, whilst the broader indices were broadly higher. It was a bad day for financials including Man Group, 3i and ICAP. For a full market report, see: London market close.

Across the Channel, the Paris CAC-40 was 2 points higher, at 5,646, and the Frankfurt DAX-30 was up 4 points at 7,456.

On Wall Street, stocks staged something of a recovery as investors focused on strong corporate profits. The Dow Jones industrial average climbed 92 points to 13,358, led by General Motors which is due to report its earnings today. The tech-rich Nasdaq was 21 points higher, at 2,583. And the S&P 500 was up 15 points to 1,473.

In Asia, the Japanese Nikkei was down 40 points to 17,248 and the Hang Seng was up 445 points to 23,184, boosted by a strong banking sector.

Crude oil had fallen to $76.66 a barrel today, whilst Brent spot was at $76.56.

Spot gold had climbed to $665.00 this morning, whilst silver was up to $12.87.

Turning to the foreign exchange markets, the pound was at 2.0277 against the dollar and 1.4796 against the euro. And the dollar was at 0.7295 against the euro and 118.97 against the yen.

And in London this morning, Lloyds TSB raised its dividend for the first time in five years after posting an expectation-beating 27% rise in H1 profit. The increase is due to a reduction in bad loans and the sale of more insurance products. Shares in Lloyds TSB were up by as much as 5% in early trading.

And our two recommended articles for today...

Why now is a bad time to go green

- At every turn, someone else is jumping on the green bandwagon. But whilst shovelling your savings into an ethical fund could soothe your conscience, is it really such a good idea? For more on the best ways to balance planning for your own future with safeguarding the future of the planet, read: Why now is a bad time to go green

Four ways to prepare for a global financial crisis

- Central bankers are increasingly worried about the risk of global financial catastrophe. Find out why they have cause for concern - and how you can put yourself in the best position to ride out a crisis - by clicking here: Four ways to prepare for a global financial crisis

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.