Kub's Den
Elaine Kub 11/22 8:51 AM

Is your grocery bill for Thanksgiving dinner lower this year than last? That wouldn't surprise the folks over at the American Farm Bureau Federation, who have been conducting a Thanksgiving dinner grocery survey since 1986, and this year found the cost of a Thanksgiving dinner came to $20.54, the lowest inflation-adjusted level since 2010. Ample inventories of turkeys in cold storage drove down the price of that big-ticket item. The survey participants also saw lower prices for dinner rolls, pie shells, and sweet potatoes, but higher prices for whipping cream and fresh cranberries.

I love these studies -- snapshots of the commodity prices paid by end consumers. USDA's Economic Research Service also released its annual analysis of the cost of baking a pumpkin pie -- $4.12 this year, compared to $3.24 last year. It was the pumpkin itself, at 65% of the cost of the pie, which mostly led to the increase, but dairy products also contributed, with $0.30 worth of milk and $0.62 worth of butter.

Two weeks ago, I overheard a woman in a gas station say she had already started her holiday baking, and I thought, "Wow." But then I remembered some headlines I had seen about butter shortages in Europe, and I thought maybe she was on to something. After Asian countries actively imported butter through 2017 and caused world supplies to tighten, French grocery stores and bakeries have been unable to keep that critical ingredient in stock recently, even before the upcoming Christmas demand hits hardest. German butter futures hit their zenith mid-year and have fallen 28% since then. Here in the U.S., too, the front-month CME's cash-settled butter futures were as high as $2.72 per pound in August, but today the chart is 16% off that level.

I doubt that the eager holiday baker I overheard was timing her tasks as a commodities hedge, but it did get me thinking -- is there a food product which could be represented, or hedged, entirely with commodity futures contracts? Rather than tracking the retail prices at the grocery store checkout lines, do we have a wide enough variety of futures markets to track the raw materials themselves of a given product?

A mocha latte, perhaps -- coffee, milk, sugar, and cocoa are all commodities traded on futures exchanges. Or a rough equivalent could be made of a cheeseburger -- live cattle futures, CME cash-settled cheese futures, and wheat futures (too bad there's no pickle contract). But perhaps the most seasonally appropriate food product, which we could represent with an index of commodity futures prices, is the sugar cookie.

A pretty standard sugar cookie recipe calls for 3 cups of flour (equivalent to milling about 0.019 bushel of wheat), plus 1 cup of butter, 1 cup of sugar, and 1 egg. Let's not get too hung up about baking powder, salt, or cookie sprinkles. Instead, just consider a representative index of Kansas City wheat futures, CME cash-settled butter futures, and the Sugar No. 11 contract, the world benchmark contract for raw sugar trading. To be truly representative, the index would also need to undertake some kind of over-the-counter swap to track the Producer Price Index of Chicken Eggs from the U.S. Bureau of Labor Statistics. Easy enough.

What would this theoretical Sugar Cookie Index show us? As of November 2017, the commodity raw materials that go into one batch of sugar cookies would be worth $1.47. By far the most expensive ingredient is the butter, at $1.14 of that total. The sum also included 8 cents-worth of wheat, 7 cents-worth of sugar, and 17 cents for one egg. This is 18% lower than the index's all-time high of $1.79 during the fall of 2015. Because the butter is such a massive contributor to the cookies' cost, the overall Sugar Cookie Index tracks the CME butter contract almost month-by-month, except for a period in mid-2015, when a spike in egg prices correspondingly boosted the overall index.

Of course, these raw material costs don't really replicate what consumers pay at the grocery store, and that's especially true for the wheat futures portion of this Sugar Cookie Index. The three cups of flour in the cookie recipe work out to $0.08 of wheat, the raw material, but in actual retail terms, the true cost of the flour is more than three times higher. Three cups of all-purpose flour is about $0.27 worth of flour, at retail prices. In economic terms, the price transmission of raw material wheat costs into retail flour costs is generally considered to be somewhere around 20%. That is to say, if wheat prices doubled from $4 to $8, then we might see a 5-pound bag of flour go from $1.72 to $2.06. Not hugely disruptive to most grocery shoppers.

And that's the only important lesson to be drawn from the Sugar Cookie Index. As much as grain producers worried about demand destruction during past time periods of high prices, it was rarely the raw material costs that spooked consumers at the grocery store. However, the grain industry's more influential customers -- the livestock feeders and fuel processors and export buyers -- are buying raw materials at prices that don't get shrouded in all the processing and packaging and overhead of a grocery store item. The elasticity of their demand responds directly to the commodities' prices. This period of low prices, therefore, is an ideal time to be boosting demand and developing relationships with new customers. Ever-stronger grain demand is something I hope we can all feel thankful about this marketing year.

Farm Bureau's Thanksgiving Dinner price survey: https://www.fb.org/…

Cost of pumpkin pie ingredients, USDA ERS: https://www.ers.usda.gov/…

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.


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