Practical Dad

PracticalDad Price Index - January 2016:  Welcome to the Jungle

The pricing for the 47 item PracticalDad Price Index marketbasket is complete and after looking at the results, the one phrase that crossed my mind is welcome to the jungle.  The changes that I'm seeing from one month to the next are symptomatic of what's occurring in the larger economy in multiple ways.

In terms of pure numbers, the 47 item January 2016 PracticalDad Price Index declined from December's 104.92 to January's 104.54 (November 2010 = 100) while the 37 Food-Only Subindex dropped more than a full basis point from December's 106.39 to January's 105.25 (November 2010 = 100).  Please note that for the Food-Only Subindex, the cumulative decline from the December 2014 apex of 115.13 is now greater than 65%; it took more than four years of quantitative easing and loose monetary policy to bring that subindex for the 37 item foodstuff item marketbasket up by more than 15%.  With the cease of QE and persistent economic pressure upon the family, it's only taken 13 months to undo it.

So how is this akin to a jungle?  You have to understand why the three store average dropped as much as it did in one month - unbelievably (to me, at least), the cost of a pound of 80% lean ground beef actually dropped by an average of 5.4%.  If you're going to store or watching the news, you'd be in company with me at this drop.  But what was surprising - and informative - was the cause for the decline. All of the surveyed stores sold their 80% lean beef in store wrapped packages but last week, two of the three - each a part of a chain - were selling their 80% in a large, pill-shaped package called a chub instead of the usual packaging.  I'd seen the chubs before, but they had always been for the lower margin/higher fat 73% lean and because they were not part of the survey, I'd simply ignored them.  When the numbers were tabulated and the indices found, I decided to go back to the two stores to examine the beef further.  Each of the chubs, now sold in the two chains, were produced by a firm called JBS LLC, USA; this is the American subsidiary of a Brazilian multinational meat packing firm founded in Brazil in 1953.  As I perused further, I saw that JBS had done a serious job of growth via acquisition of firms both in the US and elsewhere.  They have diversified first across types of protein so that they now produce poultry as well as beef and they've diversified vertically by the purchase of massive feedlot operations used to fatten cattle prior to slaughter; in 2008, they purchased Five Rivers Cattle Feeding to make them the largest cattle feeder in the world.  They further extended their control by the 2010 purchase of the McElhaney Feedlot in Arizona, which increased their cattle feeding capacity by more than 130,000 head at one time.  So the producer of the chub is a massive presence in the beef production industry.

What scares the central banks about deflation is that during the Great Depression, money became so scarce that many companies lost control of their ability to set and maintain prices, resulting in their ultimate bankruptcies.  Competition amongst producers simply came down to which could survive long enough, a truly dog eat dog scenario.  This is eerily reminiscent as money continues to flow out of the middle class and budgeted food dollars are replaced only partially by government food stamp programs, placing greater pressure on the grocers and by extension, the producers.  As the preceding information about JBS SA shows, this is a firm that's built for survival via sheer economies of scale.  What's also notable about this change in the offering of 80% lean is that the chub is now the package offering for a higher grade of ground beef.  If you accept the proposition that the lower and fattier grades of beef are the province of those with less money, then a shift in packaging to the chub by a mass producer is an indication that the extent of the family budget woes are creeping throughout the middle class.  Obviously, executives at the grocery chains are noticing drops in sales and are aware of why and rolling out a lower priced alternative is the logical response.  However, this is not the kind of indicator that you want to see. 

The jungle metaphor also refers back to one of the great impact novels of the early 20th century, Upton Sinclair's The Jungle.  Sinclair's book was a work that exposed the conditions of the meat-packing industry of that period and by extension, the conditions that prevailed overall when businesses were able to operate without any form of oversight to enforce the most basic sanitary conditions.  It helped to establish the mindset that there was a legitimate role for government in the regulation of heretofore laissez faire competition.  One of the later upshots of this was the establishment of the Food and Drug Administration to oversee the safety of what goes on the table.  This isn't to necessarily say that the packing conditions are horrible and the product tainted, but when businesses get to the size that meat production is akin to factory conditions, then it does make me wonder.

And now to the results of the Indices for the past six months.

 

PracticalDad Price Index: January, 2016
Month Total Index Food-Only Index Spread
1/16 104.54 105.25 .71
12/15 104.92 106.39 1.47
11/15 104.79 105.97 1.18
10/15 106.17 107.07 .90
9/15 105.21 107.12 1.91
8/15 104.96 106.97 2.01

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