Growing incomes in those nations also mean a growing appetite for grains and livestock. At the same time, poor weather hurt this year's world wheat crop, cutting the supply to a 30-year low. Rising demand for corn-based ethanol means not only that agriculture prices are more closely tied to oil prices, but that farmers are devoting more acreage to corn and less to other crops — a big reason soybean prices jumped from about $6.25 a bushel on futures markets last year to nearly $11 this year.
"High demand, low supply — the market is completely changed," says David Doeringsfeld, general manager of the Port of Lewiston, Idaho, which has seen a surge in barge shipments of grain this year. Doeringsfeld's facility ships to the Port of Portland, which set a port record in September for the most tonnage in a single month. The vast majority of it was dry bulk cargo, including grain, potash and soda ash.
The greater interest by big hedge funds and other investors in commodity markets is also a factor in price volatility, though it's not clear how much. But there's no question that commodity investment has gone mainstream.
The Options Group, an executive search and strategic consulting firm, in a recent study found commodity hiring rates on pace to jump 33% from 2006, while top pay packages are five times bigger than in 2002. Investment banks are hiring commodity traders, given the rapid rise in raw materials.
Of course, price pressures have moderated for some commodities. Lumber prices are down sharply since 2005, with a number of lumber mills closing — some permanently — as housing tumbles.
But Ken Simonson, chief economist of the Associated General Contractors of America, predicts another upswing in materials prices. Construction prices have been rising at a 2% to 3% annual rate in the past few months, which Simonson predicts will soon rise to a 4% to 6% pace and a 6% to 8% rate a year from now.
"So much of what construction uses requires a lot of energy to mine or mill or manufacture or deliver," Simonson says.
The surge in commodity prices hurts profits for many firms, depresses consumer spending, and pumps up the odds of increased inflation.
FedEx fdx, for example, announced lower earnings due to high fuel prices. Campbell Soup cpb said high food and promotional costs crimped its bottom line.
Ken Goldstein, economist for the Conference Board, a private financial-analysis firm, notes that with profits down from recent lofty levels, companies may no longer be able to cover the higher cost of materials by reducing earnings.
"Despite all this talk about profit growth, earnings growth peaked a year ago," Goldstein says. "Businesses are going to have to force through some earnings power."
Some firms are.
Domino's and most pizza-delivery companies now levy a delivery charge, in part to compensate drivers for rising gasoline prices. Pepsi pep raised Gatorade prices in the spring, citing delivery costs, and Starbucks bumped prices, too, blaming soaring dairy costs.
Economists, including the Fed, often prefer to use the core rate of inflation, which excludes the volatile food and energy components, when assessing short-term inflation trends. Consumers can't do that. Retail food inflation is running at a 5.5% rate this year, more than double the average pace. The energy component of the consumer price index has gained 14.5% since last October.