Bankruptcies are on the rise among the nations mid-size retailers. Eight have filed for bankruptcy protection over the past several months, including such diverse retailers as Levitz and Sharper Image. In addition, the nations larger retailers are in the process of closing retail stores or drastically reducing new openings. Times are tough, in other words, which is hardly surprising in view of several relevant factors.

• The persistent rise in food and oil prices reduces other retail purchases.
• The softening job market leads to consumer caution and stagnant or reduced retail spending.
• The collapse in housing and the rise in foreclosures and forced vacancies directly impacts furniture, bed and bath, and appliance retailers.
• The credit crisis and tightening credit standards, coupled with a heavy consumer debt burden, moderates consumer borrowing and retail spending.
• The credit crisis and tightening credit standards, coupled with a heavy retailer debt burden, places severe pressure on retailer debt service.

The ripple effects follow the normal pattern. Cash payments to suppliers, employees, lessors, and lenders stop with the bankruptcy filing. Given the 2005 changes in the federal bankruptcy code, suppliers may turn out to be the preferred party among those awaiting payment. This set of payment priorities, however, will likely put greater strain on retailer cash generated in bankruptcy, which may lead to a rather quick exit from Chapter 11 to Chapter 7 and final liquidation of company assets.

The prognosis for retailers is rather dim, as we might expect given the set of forces and factors impacting the industry. According to a recent report in the New York Times, the International Council of Shopping Centers anticipates roughly 6,000 retail store closings in 2008 – an increase of approximately 25% over the number of closings in 2007. Further, based on March results, sales in stores open at least one year fell 0.5%, which is the worst performance over the past 13 years.

As we’re all aware, the prices of such basics commodities as wheat, corn, rice, and oil have escalated at an impressive rate recently. There are several forces driving market prices.

• Increased affluence in emerging markets, such as China, leads to a change in dietary choices and preferences, frequently in favor of more beef consumption. An increasing demand for beef translates to a disproportionate increase in the demand for animal feed – hay, straw, silage, corn, maize – which ripples through to increased price pressure on foodstuffs for human consumption.
• Since modern farming is highly energy intensive, increased oil prices, driven in part by a falling dollar and the voracious demand for oil from several emerging economies, increases the cost of farm production and, subsequently, farm prices.
• Bad weather in critical agricultural production areas of the world, such as the continuing drought in Australia, limits the supply of agricultural products, which results in further upward pressure on prices – especially given increasing demand.
• Agriculture subsidies in the U.S. in favor of corn production for conversion to ethanol divert that basic commodity from the consumer market, which works to limit supply and leads to further upward price pressure.
• Finally, governments and private grain dealers have allowed inventory of most basic foodstuffs to diminish over the past several years. As a result, there is little reserve to cushion the price impact of rising demand.

We are in the midst of a financial and credit crisis, neither of which seems inclined to disappear quickly, and by all accounts on the doorstep of a possible recession. And in tough economic times, rising food and oil prices only add to the anxiety and financial pressure. The pressures driving food and oil prices may abate with a general slow-down in the global economy, should that occur. But in the meantime considerably higher food and oil prices may be the rule rather than the exception.