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Saturday, April 9, 2011

Commodities, Inflation, and Media Spending

Virtually every Saturday morning I visit a local farmers market. It is a wonderful experience. The food is plentiful and inexpensive and often the person selling you the fresh produce or baked goods is the individual who grew it or made it. Much of the food is authentically organic and if you stop and chat for a moment they often will suggest how to prepare it for maximum taste appeal and enjoyment. The crowd is fascinating as well. You see an amazing cross section of Americans from investment bankers, U.S. congressmen, teachers, left wing activists, and urban poor. Every so often a fellow a few years older than I stops me and wants to know if I am interested in reading some literature from the Socialist Workers Alliance. My wife tells me that I need to shave and stop wearing a sweatshirt before going to the market! The fellow acts as if it is still 1970 and I must say that I admire his persistence, purity and total refusal to abandon his 22 year old convictions. Yet, perhaps Disraeli was correct when he said, "If you are 20 years old and a conservative you have no heart, but if you are 60 years old and a liberal you have no brains."

This morning we visited the market and, as usual, we picked up some great bargains relative to grocery store prices. At the same time, monitoring the scene from a consumer behavior stand point it is clear that prices are beginning to move up smartly. Fresh organic eggs had been $3.00 a dozen recently and now weigh in at $3.50. That is a 16.6% increase almost overnight. Our Federal reserve Chairman Ben Bernanke says that inflation is not a real issue in the U.S. today. I would like him to accompany me to a farmers market or a supermarket one day and then do it again a month later.

The Fed does not include food or energy prices in their inflation calculations. Yet they are two areas where all Americans spend money. If they rise at all, the bulk of Americans feel it; some very significantly if they are struggling.

Back in the 1970's, when we last had serious inflation, most producers and food processors could simply pass on their increased costs to consumers. Now, with the economy far more fragile, marketers are getting far more cautious. Some simply cut the amount of product in each package (see Media Realism, "Skippy and Media Prices, June 11, 2010). Others have had to ratchet up prices and if oil stays high, their transportation costs will rise as well forcing them to increase charges at checkout. Wheat, corn and cotton prices are soaring in particular.

I feel and I may be in a tiny minority, that this could hurt media markets, particularly network broadcast. CEO's who see earnings struggling may decide that they can cut marketing expenses for a year or so. This almost always hurts branding long term but props up earnings for 3-9 months as sales stay fairly stable in most categories. So watch this carefully. If you operate in a local marketplace as a broadcaster or cable interconnect, things may continue to improve. But national package goods brands may do some marketing belt tightening. We could have a bit of a softer network marketplace than many expect even if the overall economy continues to expand.

Ignore the soothing comments of the Federal Reserve. If energy and commodity prices keep ramping up, something has to give in the marketing world.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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