The PPI should not be confused with the CPI, which measures inflation for goods and services purchased by consumers. The PPI provides measures of inflation both at the industry and commodity level.

It is important when we look at the year over year comparisons to note that they will look somewhat skewed given the magnitude of the increase in commodity prices last year. With the bubble burst, the picture will look odd for some time. The all food inflation index, which provides a weighted index for prices of food items at various production stages, was down 1.4 per cent from the previous month and down 6.6 per cent compared to year ago levels.

The release of the producer price inflation numbers provides us with an opportunity to reiterate a point that we have made in the past. In the past 4 years, we have seen an unprecedented inflation in the price of animal feed, especially corn. The increase has far outpaced the increases observed for meat products, which are for the most part a value added form of corn production in the US. The PPI shows that the Corn PPI measure is down 41 per cent from a year ago, which should be positive for US meat producers.

However, we have to put this in a broader context. The chart below shows the PPI index for beef, pork, chicken and corn. Because the base series is indexed to 1982 and prices since then have followed different paths, we reindexed all three series with the average of 1999 = 100.

Current corn prices may be lower than what they were a year ago but in the last 10 years they have sill appreciated much more than the main meat products. Indeed, the July 2009 corn PPI is still about 80 per cent higher than what it was in 1999. In the same time frame, beef and veal prices have appreciated by 32 per cent, broilers have appreciated by 31 per cent and pork is up just 14 per cent. This is likely good news for buyers of meat products, be this retail stores, restaurants and other outlets. It is not good news for US beef, pork and chicken producers.

At some point the disparity between input (corn) and output (meat) prices has to disappear, otherwise these industries will find it increasingly difficult to stay in business. One way to ease the disparity is through lower feed prices and propitious weather this summer likely will deliver just that. Both USDA and private companies are racing to measure the potential yields for the current crop and the early returns appear to be very promising, especially in the Western Corn Belt. But even with the great corn harvest, the disparity will ease, it will not disappear. Higher fuel prices, and efforts to blend more ethanol into gasoline, could further propel corn price and export demand is a big unknown. The bottom line is that for some (buyers), the lower PPI numbers are a welcome sight, for others (producers) they are another measure of a very difficult reality.