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Food v. energy: What's the bigger threat? With food costs at a record high and oil prices high, though retreating again today, one economist looks at which is the greater threat to inflation.
Julian Jessop, chief international economist at Capital Economics in London, believes the surge in agricultural commodities poses the greater risk, though he doesn't think the pickup in either food or oil is sustainable. Still, higher food costs will pressure overall inflation "for a while yet," Mr. Jessop said in a research note.
The hikes in oil prices are proportionately far less than those of agricultural commodities, Mr. Jessop said, while the weight given to food versus energy generally is greater in consumer price readings. As well, the lag between the rise in commodity prices and food costs in price readings is longer.
"That means that even if commodity prices now drop back sharply, the past increases will keep food inflation higher for longer too."
Oil's recent strength is largely due to strong demand given the global rebound, Mr. Jessop added, while the hike in food prices is from supply shocks such as droughts in major production regions.
Mr. Jessop's findings came as the Food and Agricultural Organization reported today that world food prices have hit their highest on record, and amid fears that the devastating floods in Australia could push them even higher.
The FAO, an arm of the United Nations based in Rome, said its food price index climbed in December to its highest since it began collecting data in 1990. The measure, which tracks costs of items such as rice, wheat, corn, sugar meat, rose more than 4 per cent from a month earlier.
That will raise fears over the possibility of another crisis like that of 2007-2008, when countries such as Bangladesh and Haiti were the scene of riots, The Financial Times reports. The index has now topped those levels.
There are also fears that the flooding in Australia, a key producing region for sugar, for example, will boost prices even more.
"Recent flooding in Australia's northeast has added to supply concerns in a number of farm commodities, which began to emerge last summer with weather problems in key producing areas (e.g., Russia, Canada)," said Kenrick Jordan of BMO Nesbitt Burns, adding that prices of wheat and corn have surged 17 per cent and 11 per cent, respectively, since the beginning of December.
"The price spike has raised fresh concerns about food price inflation," he said.
He added, though, that while higher grain and oilseed prices will pressure overall food prices in the longer term, the historical relationship between foodstuffs and prices suggests no marked inflation in industrialized countries in the near term. "In developing countries, where food accounts for a much more significant part of household budgets, the inflation threat is much greater," he said.
Bloomberg News reports today that cane growers in Australia suggest that sugar production capacity could see curbs for two to three years given the hit to crops that were planted, and the nature of regrowth.
"The production capacity for the industry will be greatly diminished as a result of the extremely wet conditions," Ron Mullins, acting chief executive officer of Canegrowers," told the news agency.
The floods in Australia's Queensland region have also pushed up coal prices as they shut down mines and hit rail transport. They could also affect monetary policy at the Reserve Bank of Australia, Scotia Capital economists Derek Holt and Gorica Djeric said today, noting the country's currency has lost more than two cents against the U.S. dollar this week.
"Australia's fortunes have taken an abrupt turn for the worse, with RBA implications," the economists wrote.
"The floods that have swept through an area the size of France and Germany combined pose a potentially sharp shock to exports and production. Comments by RBA board member Donald McGauchie late yesterday have brought RBA policy into the picture in terms of justifying a prolonged pause until the damage - and a potential reconstruction recovery - can be assessed."
Manulife cuts stock, rate exposure Manulife Financial Corp. sped up its efforts to reduce its sensitivity to stock markets and interest rates, taking moves that will decrease its long-term risks but eat into its profits in the short run, The Globe and Mail's Tara Perkins reports today in our Streetwise column.
The insurer said that, between October 1 and the end of December, it shorted about $5-billion of equity futures contracts and sold $200-million of public equities. It was able to pick up the pace of its risk-reduction plan because of favourable interest rate and equity market trends during the quarter, it said.
ADP report shows strong U.S. job gains A reading of the U.S. labour market today shows the private sector added 297,000 jobs in December, buoying hopes for Friday's government employment report.
The report from Automatic Data Processing Inc. and the Macroeconomic Advisers consulting group showed companies hiring at a far faster pace than economists had expected. It comes amid declining claims for jobless benefits in the U.S. as well, but the ADP report, while widely watched, is not seen as a key gauge.
"Other indicators point to a modest improvement in labour market conditions, but nothing like the acceleration implied here," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto. "... we still think that a range of between 150,000 and 200,000 is the most likely outcome for Friday."
World Bank issues yuan-denominated bond The World Bank has issued its first bond denominated in China's currency, which it described as a landmark move that raised $76-million (U.S.).
Other institutions, and many companies, have also issued bonds denominated in yuan, the currency also known as the renminbi, or RMB.
Reuters noted that the World Bank's support for the yuan comes just as China's status within the organization is on the rise.
"This is a landmark transaction for the World Bank as it is the first World Bank issuance in RMB, and signals the strong interest of the World Bank in supporting the development of the RMB market," said Doris Herrera-Pol, who heads capital markets at the World Bank.
Sorry, Charlie Here's one that didn't get away. A 342-kilogram (754-pound) tuna sold at an auction in Tokyo today at a record ¥32.49-million, the equivalent of almost $396,000 (U.S.), The Associated Press reports today.
It was the first auction of the year at the biggest wholesale fish market in the world.
The owners of Kyubey, a sushi restaurant in Tokyo, and Itamae Sushi, a Hong Kong-based chain, won the auction.
Boyd Erman's Morning Meeting The Communist Party news website in China is looking at an initial public offering, Streetwise columnist Boyd Erman writes today.
In Personal Finance today
You should check your credit activity at least twice a year to protect yourself from fraud. Here's a step-by-step guide.
How much should a couple save for an emergency fund? Cash clash weighs in.
Mental strategies can help keep your budget on track.
In Your Business today
A pair of good news stories today. A new report from RBC suggests Canadian small and medium-sized businesses did better at weathering the recession relative to large firms.
And the monthly barometer by the Canadian Federation of Independent Business shows SMB confidence rose in December from November and hit its highest levels since March.
While it speaks to the growing diversity of Canadian tastes, the Mumbai-inspired lunch delivery service Tiffinday is also an example of an opportunity for entrepreneurs - businesses inspired by foreign traditions, products or services that could flourish if adapted and launched here.
From today's Report on Business
- Sales gains give hope for Detroit Three auto makers
- Retailers feel heat from parity-happy Canadians
- Manufacturing lifts global recovery
- Follow our series on 11 themes for '11