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How expensive is your breakfast? - Views on News from Equitymaster
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  • Aug 20, 2010

    How expensive is your breakfast?

    We drew inspiration for this piece from an article in The Economist on the rising cost of breakfast worldwide. Being the most important meal of the day, its rising cost impacts every household's food budget. Taking costs of items such as wheat, coffee and orange juice, ingredients for breakfast in much of the developed world has increased. Prices have risen by as much as 25% since the beginning of June 2010.

    In India, commodity prices have been on the rise and food prices are soaring. According to the latest statistics, India's food inflation rose by 10.4% YoY in the week ended August 7 2010. This is lower than the 11.4% rate clocked in the previous week. But inflation continues to be in double digits. And that is the concerning part.

    We decided to give this breakfast example on food price inflation an 'Indian' spin. We concentrated on items that Indians usually eat in their first meal of the day. We used global prices sourced from the International Monetary Fund (IMF) in order to see the trend in which prices for these basic food items are moving. Even though the prices of these commodities in India may be different, they will follow almost similar trends.

    A cup of steaming tea is what every single Indian house wakes up to. Non-drinkers will at least have a cup of coffee for their caffeine fix. Nevertheless, a hot beverage will be consumed by almost every household in the morning. Prices of tea, coffee, and cocoa, measured by the commodity beverage price index have increased by 13% since last year. Now, you might have to think twice before you pick up your third cup. Especially since sugar prices have increased by over 21% in the same period (US import prices).

    Source: Indexmundi.com, IMF
    Commodity Beverage Price Index, 2005 = 100, includes Coffee, Tea, and Cocoa

    Well something that we could have cheered about is that prices of basic items like rice and wheat have currently fallen relative to where they were last year. Rice is a staple in our breakfast diets with 'dosas', 'idlis', 'poha', among others being consumed on a regular basis. Wheat is also a major contributor to our breakfasts with 'parathas', bread, 'upma' and 'rotis' being consumed daily. Westernization has also caused us Indians to increasingly consume more breakfast cereals (wheat based) for breakfast. All with the help of Kellogg's rampant advertising. Both these commodities had a fall relative to the food price index which clocked a 6% gain versus last year. But this period of low prices seems to be over.

    Wheat prices are expected to rise dramatically. Russia, the world's fourth largest producer of wheat is facing severe drought. This caused over 1/5th of the wheat to be destroyed and caused prices to skyrocket. Other big wheat producer countries Kazakhstan and Ukraine have also faced drought. In India, food grains lie rotting under the skies without adequate storage facilities. This also contributed to the price hike.

    Prices of bananas have however shot up by around 18% in the past one year. Being a major nutrition source and a common fruit, such a high price rise is unprecedented. Moreover, the US market which we have chosen to compare with, has no tariffs or import restrictions. This makes the cost rise even more significant.

    Source: Indexmundi.com, IMF
    Commodity Food Price Index, 2005 = 100,
    includes cereal, vegetable oils, meat, seafood,
    sugar, bananas, and oranges price indices, FPI is Food Price Index
    Bananas: Central American and Ecuador,
    FOB U.S. Ports, US $/metric tonne,
    Rice: Rice, 5% broken milled white rice, Thailand nominal price quote, US $/metric tonne
    Wheat: No.1 Hard red winter, ordinary protein, FOB Gulf of Mexico, US $/metric tone

    According to the Indian inflation figures released recently in August 2010, the prices of pulses were up 18.3% from a year ago, milk by 19%, fruits by 16.7%, rice by 8.3%, cereals by 7.4% and wheat by 7.6%. Well, let us hope that the rain gods, which have so far been smiling down nicely, continue to shower us with their blessings. This will help lower inflation and prices of food to fall. Else, all we will have to contend with in the morning will be reports on inflation and interest rate hikes coming in from our daily newspaper.



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