A whiff of inflation in McCormick's spice price

February 01, 2011|By Jay Hancock

A flood in India, Chinese garlic speculators, a growing global economy, ethanol subsidies in Iowa and a dozen other factors are making your Lawry's Seasoned Salt more expensive. And that's not all.

Rising prices for food and other commodities have people talking about a resurgence of consumer-price inflation, which has been all but dead for years.

On Monday, West Texas crude hit $92 a barrel, its highest price since 2008. The price of milk rose 5 percent last year, according to the Labor Department.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech Monday that he expects a "gradual firming of underlying inflation pressures" over the next two years.

McCormick & Co., the Sparks-based purveyor of Lawry's and numerous other flavorings derived from herbs and spices, has been seeing its raw-material prices rise by 7 percent or 8 percent annually. And that's just an average.

Cinnamon costs doubled last year. Black pepper tripled. And garlic rose more than 300 percent.

"It's a very volatile global environment," Jim Radin, vice president of global supply-chain operations for McCormick, said in an interview Monday. "I wouldn't call them unprecedented increases, but they're along the lines of what we saw in '07 and '08. And right now, we don't see anything that would significantly inhibit that."

The inflation of 2007 and 2008 was extinguished by the financial collapse. But renewed global growth is increasing demand and price pressures on all kinds of commodities, especially food. McCormick, which buys herbs and spices all over the world, is stuck in the middle, hit with higher costs but reluctant to pass them on to customers.

McCormick has raised prices by 3 percent on average. That's less than the pop in its supply expense. But it's still higher than inflation has been in recent years.

Part of the story is weather, as is often the case with food-price spikes.

Floods in India wrecked the onion crop. A bad winter in China hurt garlic output. Talk of black-pepper shortages prompted speculation and hoarding, which made shortages worse. An onion export ban by India and similar policies with other crops in other countries haven't helped.

McCormick tries to diversify supply lines, doing business in multiple regions in case one suffers problems. But in a globalized economy, price swings that once might have been localized immediately are reflected in market exchanges everywhere.

"We see more global connectivity between commodities and between growing regions than we've ever seen before," Radin said.

It's not just dealers and speculators who are more plugged in. Growers are, too.

"Farmers around the world are better informed," Radin said. "It's the Information Age. It's not unusual to go to a marketplace in India, and the farmers have laptops and satellite links. Years ago, we didn't have that."

That means farmers could be more likely to hoard supplies if they think prices will continue to rise. Or they'll be quicker to switch crops if they think it will earn more money. That makes harvests more volatile.

Generous subsidies for ethanol, the alternative fuel made from corn-derived alcohol, continue to cause food inflation by inducing farmers to abandon food crops for ethanol maize. It's less of a factor for McCormick than, say, for a baker buying lots of wheat flour. But it's part of the mix.

Prices of food, energy and other commodities frequently soar without signaling a sustained increase in overall inflation. The question is whether this is one of those times.

"Inflation will rise in the next few years, but not a lot," says Nariman Behravesh, chief economist at IHS Global Insight, whose analysis typifies the "inflation is not a problem" viewpoint. "We had really the same situation in 2008, when you had a huge spike in food prices and an even bigger spike in oil prices — and there was almost no spillover into the overall economy."

Perhaps that's because the biggest financial collapse in eight decades let all the air out. The surplus in workers and industrial capacity that resulted from the crash will keep prices under control for a long time, analysts such as Behravesh believe.

But this isn't 2008. No new crash is on the horizon. Ultralow interest rates have flooded the world with money. The increase in herb and spice prices has partly to do with greater demand by confident consumers in an expanding economy. McCormick's own results show that as well as anything. Sales rose 6 percent last quarter and profits last year hit a record.

If the global economy keeps growing, it will increase demand not just for spices but for manufactured goods, labor and energy. That could lead to prices higher than many now expect.


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