Connecting Food Prices to Debt Collection

World Acceptance Corporation‘s (Nasdaq:WRLD) 2011 10-K goes into detail about how increases in the prices of commodities lead to higher charge-off rates for their loan portfolio.

During fiscal year 2010 our charge-offs as a percent of average net loans decreased to 15.5% from 16.7% in fiscal 2009. We believe our customer base is highly impacted by the cost of basic commodities such as food and energy and unemployment. The cost of basic commodities rose steeply during the first several months of our fiscal 2009, which had a negative impact on our customer’s ability to repay outstanding loans. This, in turn, drove our charge-off ratio up significantly over our historical experience.

Food prices are going up in part because of factors that are outside of anyone’s control. Not even the federal government can counteract a drought in the Ukraine or crop infestation in Manitoba.

But people need to eat. The number of people receiving SNAP (food stamps) assistance has increased from 27 million to 44 million in just the last four years. The pace of enrollments is actually increasing, too. In North Carolina, food stamp rolls have jumped 17.6 percent in 12 months. That only ranks 9th in the country. The rate of increase tops out at more than 20 percent in New Jersey.

The USDA says that a family of four with non-infant children needs $141 in groceries per week. The sum was $134 in November. While that is more, consider that the price of wheat is up 29.33 percent in the last six months. The cost of energy is up 26 percent.

Oddly, the price of coffee is up 28 percent but the price of tea is down 1.2 percent. Maybe we should all just drink more darjeeling.

Some un-banked/alternative financial service companies are vulnerable to hikes in the price of food. Anyone that does collections is going to find it that much harder to harass their debtors. It w ill be the same story with payday lenders. One group that will be protected is the pawn shops. Right now, the pawn companies are acting as gold brokers. Gold is at $1500 an ounce – an historical high.