Make hay while the sun shines

Saturday, 28 August 2021 — Melbourne, Australia

[3 min read]

Dear Reader,

Have you noticed meat prices? They are climbing.

During a visit to his shop this week my butcher said, ‘For a long time, it used to be a kilo of beef was around $4–$5, now it’s over $9, the highest I’ve seen.’

That’s right.

The Eastern States Young Cattle Indicator (EYCI), which keeps track of meat prices in Australia, reached 1,000 cents a kilo in July. In fact, the price rise was so unexpected that the National Livestock Reporting Service had to ask IT to add on an extra digit to their online reporting system.

The EYCI is now at 1,028 cents a kilo, up around 35% since September last year and over 120% up since January 2020.

I mean, there are several things at play here. Farmers have been replenishing their herds after the drought and herd numbers are tight. There’s also been strong global demand for beef.

But there may also be another factor.

Here’s Farm Weekly :

‘Analysts are now pointing to the chronic lack of skilled meat workers as a key driver of high cattle prices.

‘International analyst Simon Quilty, Global Agritrends, says beef processing in Australia has reached a critical inflection point in terms of labour.

‘Pandemic travel bans and the restriction on foreign workers coming to Australia has seen the lifeblood of Australia's supply of skilled workers shut down.

‘“This has been occurring for 15 months, and the available skilled workers pool in Australia has now run dry,” Mr Quilty said.

‘“Some sources estimate that there is currently a shortage of up to 4,000 jobs in the meat processing sector,” the MLA projections said.’

But higher beef prices and work shortages are not only a problem in Australia.

Global beef prices have almost doubled since January 2020.

In the US, hamburger chain Burger King recently said in a report it expects beef prices to continue rising this quarter due to work shortages:

‘Commodity price inflation continues to be a hot topic, particularly for proteins. Labor shortages in meatpacker facilities and food-service locations in the U.S. add to the upward pressure in prices.’

In the UK, which is suffering worker shortages not only from the pandemic but also Brexit, Nando’s had to close 10% of their restaurants because of a chicken shortage and there are warnings this year could be a turkey-less Christmas.

From The Guardian:

‘Desperate food manufacturers are pleading with the government to be able to call upon prisoners to solve a labour crisis blamed on the double blow of Brexit and Covid.

‘The British Meat Processors Association (BMPA), whose membership includes the UK’s meat processing companies, said businesses were “leaving no stone unturned” to find workers, including contacting the Prison Service.’

I wrote last week about how employers here in Australia and around the world were having trouble finding staff and are offering higher wages and signing bonuses to those wanting to work.

It’s hard to know what’s really going on.

It could be that benefits are discouraging workers to go back to work…

It could be that workers are worried about the pandemic and want better pay for the risk…

It could be that workers are waiting for better jobs that offer more security…

It could be a mix of all the above.

But what’s clear is that all this means higher costs to do business, and that those costs will likely get passed on to consumers.

Inflation is seeping into the economy.

Back in 2008 we had similar warnings of inflation after central banks engaged in quantitative easing and lowered interest rates to record lows. But those fears deflated quickly.

In my mind though, there are a few differences this time.

In 2008, the property bubble burst. Property values collapsed and unemployment soared, leaving people with assets that were worth less than before and high debt.

At the same time, there was a generalised loss of confidence in financial institutions. These closed the credit taps and used the money to buff up their balance sheets. It meant that liquidity drained from the system and demand collapsed.

This time, there’s lots of demand but not enough supply.

So far, we’ve seen lots of liquidity pumped into the system and locked-up consumers have nowhere to spend. Asset prices have kept on rising.

Employers are struggling to find workers, and this along with global supply disruptions is pushing inflation.

By the time you read this, US Fed Chair Jerome Powell will have already delivered his speech at the Jackson Hole Summit.

There’s talk that the US Fed may give an indication of when they’ll start tapering stimulus.

In a CNBC interview, St Louis Fed President James Bullard said:

‘I think we’re going to get at least 2.5% inflation in 2022, maybe higher than that, and there’s some risk to the upside on that. So, for that reason, I think we want to get going on taper―get the taper finished by the end of the first quarter next year, and then we can evaluate what the situation is.’

Things could get tricky if central banks start draining liquidity out of the system. It’s something they tried in 2018…and didn’t work out very well.

That’s why it doesn’t seem like it will be happening any time soon, especially with cases ramping up from the Delta variant.

Which would mean that inflation stays higher than interest rates for a while...and that’s when gold does well.

On that note, my colleague Brian Chu thinks this is the perfect time to trade gold stocks. You can find more about that here.

Best,

Selva Freigedo,
For The Rum Rebellion

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.