When crude oil topped $100 a barrel early in the new year, it was more than simply a record high.
Oil had been setting new records since 2004 when it passed the previous high set in 1980 of about $40 a barrel.
But economists kept telling us that the inflation-adjusted burden of oil costs was not as great as it was in the oil crisis of the late 1970s and early 1980s.
But $40 in 1980 is worth about $100 today so the effect of oil prices today is truly on par with the last oil crisis.
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Expensive oil triggered soaring inflation in the late ’70s and early ’80s – hitting double digits some years – and it threatens to do so again today.
The situation will require a deft hand by central banks as they manage interest rates. Normally, they seek to calm rising inflation by raising interest rates and cooling the economy, but the U.S. economy in particular is already cooling, dampened by the housing mortgage crisis and the extra costs of rising oil prices. The U.S. Federal Reserve Board won’t want to raise interest rates and push the economy into recession. Indeed, most think it will lower rates to prop up the economy.
There are other factors contributing to inflation.
They include rising food prices. There have been lots of headlines about strong food commodity prices contributing to rising grocery bills.
It must be remembered that rising oil prices are the dominant factor behind higher grocery prices, although the more modest effect of rising grain and oilseeds cannot be ignored.
But, as with oil, it is valuable to assess the inflation-adjusted burden of food prices.
Spring wheat futures on the Minneapolis exchange are now well above their previous record high of $7.10 per bushel set in 1996.
However, when inflation is considered, today’s wheat prices are still lower than they were 25 to 35 years ago in the heyday of inflation.
Minneapolis wheat futures hit $5.10 a bu. in 1980. That would be worth about $12.40 today. In 1974, after the Soviet Union surprised the market by secretly buying up most of the surplus wheat available, wheat hit $6.09 a bu., worth about $25 a bu. today.
Chicago corn was as high as $3.96 a bu. in 1980, worth more than $9.50 at today’s dollar.
Soybean futures in Chicago in 1980 climbed to $9.23 a bu., worth about $22.50 today.
Canola did not enjoy a particularly strong year in 1980 with a futures price high of $8.50 per bu. But when adjusted for inflation, that was worth $20.75 at today’s dollar.
Canola’s all time high was set in 1984 when it climbed above $16.40 per bu., worth close to $29.50 today.
So clearly, food commodity prices today are not as great a burden to buyers as they were in the inflationary times of the late 1970s and early 1980s.
Charts change
We have made two small alterations to the data on page 8. Note that the Winnipeg grain exchange is now called ICE Futures Canada, so the labels in our Canadian futures price tables refer to Winnipeg ICE.
The line charts that track trends in Winnipeg ICE prices for barley, canola, flax and feed wheat will now all follow the cash price. They reflect the best bid and basis as compiled by ICE Futures Canada.
The canola basis retains its own chart. The basis for barley and feed wheat are listed in a small box within the chart. The flax chart reflects the cash price trackside in Thunder Bay and there is no basis.
