Tuesday, December 09, 2008

Add a new Crisis. Food prices risen to the tip of the Iceberg.

What a relief to see gas prices falling - some places are selling as low as $1.80 a gallon. There are a number of factors that can effect costs, including long term contracts, weather conditions, even global demand for different foods. Retail food prices have jumped on average 6 percent this year — triple the normal inflation rate of around 2 percent. The economics of the food business are partly to blame. Though crude oil is the main ingredient of gasoline, processed foods like cereal, crackers or cookies use only a small amount of corn, wheat and other grains, limiting manufacturers' pricing power. So why aren't food prices falling as well?

Add another economic worry to inflation and deflation: ecoflation, the rising cost of doing business in a world with a changing climate.

Ecoflation could hit consumer goods hard in the next five to 10 years, according to a report by World Resources Institute and A.T. Kearney, a global management consulting firm.

Companies that make fast-moving consumer goods, everything from cereal to shampoo, could see earnings drop by 13 percent to 31 percent by 2013 and 19 percent to 47 percent by 2018 if they do not adopt sustainable environmental practices, the report said.

The costs of global warming are showing up now in the form of worse heat waves, droughts, wildfires and possibly more severe tropical storms but they are not yet reflected in consumer prices, said the institute's Andrew Aulisi after the report's Dec. 2 release.

Instead, these costs are paid by governments and society, Aulisi said in a telephone interview. That could change if President-elect Barack Obama and the U.S. Congress push for a system that puts a price on the emission of climate-warming carbon dioxide, Aulisi said.

This is unlikely to happen next year in time for a December 2009 deadline to craft an international pact to fight climate change but it is more likely to happen in 2010.

These rising costs and possible tightening regulation of greenhouse gas emissions are not necessarily a bad thing, he said.

"The message we don't see in this study is that regulation is going to cost ... a lot of money," Aulisi said. "We think the analysis is a catalyst to convince companies to take greater action on these important issues."


In fact, some companies are already looking at ways to cut their emissions in advance of any new regulation, said Daniel Mahler of A.T. Kearney.

One example is consumer giant Procter & Gamble (PG.N: Quote, Profile, Research, Stock Buzz), which has a team looking across the company's varied laundry, hair-care and health-care businesses to see how they can use less plastic, a fossil-based material, Mahler said by telephone.

But the changes may need to go deeper and wider, he said, spreading to the basics of how supply chains are managed.

For instance, companies that presumed U.S. transportation costs would be low and U.S. labor costs would be high had their goods made in countries where employees would work for less. But a new cost to the carbon emitted by long-distance transport could change that equation, making foreign manufacturing less attractive, Mahler said.

Within the United States, there could be a move away from big, centralized manufacturing plants to smaller, more widely dispersed ones, according to Mahler.

"That is not a little tactical change," he said. "It is an infrastructure change that we see companies ... addressing much more aggressively than they had been in the past

Under the ecoflation scenario, the world's major economies are likely to set a price on carbon emissions of $50 a tonne, Aulisi said.

That is between five and 10 times the price of carbon being traded on voluntary markets in the United States now. There is no mandatory U.S. carbon market, though the first regional market will begin trading in January

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