Forecasting the cost of food
Prices are climbing again as the ongoing dry weather in Europe looks set to hit grain harvests, with retailers and consumers already gearing up for the impact
Print20 June 2011
The unseasonably dry spring weather in Northern Europe has got cereal growers in France, Germany, Poland and the UK – which together account for approximately 65% of Europe’s grain harvest – seriously worried about this year’s harvests.
In the UK last month, the Centre for Ecology and Hydrology announced that many parts of the south were experiencing the worst drought conditions since 1976, while April was the warmest since records began 100 years ago.
France’s response to the unusually dry spell has been to convene an emergency national drought committee. As the EU’s top wheat producer, France has most to lose from a prolonged drought and will take no comfort from Meteo France’s latest long-term forecast which is predicting above-average temperatures right through to July.
Meanwhile, US producers have been hit by a double-whammy: too much rain in the north, which is delaying maize and wheat sowing, and too little in the south, which is stunting development of the winter crop.
“Normally what you’ll find is one major region might have a bit of a weather event but seldom do you see a widespread weather event right across the northern hemisphere and that’s what you’re seeing at the moment,” says Fintan Conway, executive secretary of the Irish Farmers’ Association (IFA) grain committee.
France predicting drop in wheat output
Although it’s too early to say precisely what impact the dry spell will have on Europe’s harvests, France is already forecasting a drop of 11.5% in its wheat output this year compared with last. In neighbouring Germany, the prediction is for a 7.2% year-on-year decline in the wheat harvest.
Fortunately, despite an exceptionally dry March and April, Ireland has escaped the worst of the drought and cereal harvests do not look like being negatively affected overall. However, there may still be geographical pockets where the drier weather takes its toll, says Conway.
“Our members are telling us that crops are looking very well in the south-east right through to Cork although there are some concerns in the midlands – the Athy/Kildare sort of area – where soils are drier. Having said that, we suspect that crops are pretty well established and you shouldn’t see the same impact they’re having in the UK, France or Germany at the moment,” says Conway.
Food prices will rise due to commodity prices around the world
Despite avoiding the worst of the drought, Ireland will not escape its impact, at least in terms of food prices. In the modern world, food is an international business, not a national one, and grain shortages in Europe and the US will inevitably push up commodity prices and, by extension, the price of staples such as breakfast cereals and bread in Irish retail outlets. This already appears to be happening, in fact. While the consumer price index (CPI) showed a 0.5% drop in food and beverage prices in the 12 months to April 2011, other indicators suggest that food prices have been rising of late.
The National Consumer Agency (NCA) both conducts regular surveys of grocery prices of its own and buys in market research data from Kantar Worldpanel. According to Fergal O’Leary, assistant director of policy and research at the NCA, both sources of data are pointing to rising food prices. “It is clear to us from this data that prices have been increasing, particularly since Christmas.”
Consumers trade down for lower prices
The data also finds that consumers have not taken the price rises lying down. Rather than paying the extra, they are trading down to cheaper brands and own-label product. For O’Leary, this is a sign that with less money in their pockets Irish shoppers have grown increasingly canny about their shopping habits.
“We’re seeing a decrease in spend by consumers on average and they’re mitigating the increases in prices by buying cheaper items or moving into own brand. From our perspective, consumers are reacting in a particularly smart way. They’re not going along with the price increases; they’re doing their best to mitigate them,” he says.
Basket-splitting
Another sign of the times is the growing practice of ‘basket-splitting’ – consumers visiting two or more stores to do a weekly shop to get the best value for money.
“Consumers aren’t as loyal as they used to be and they will move on,” says O’Leary, adding that waning loyalty also extends to individual products/brands, with consumers willing to shun a favourite item if the price rises beyond what they are willing to pay.
While consumers have modified their buying habits in response to the price increases, retailers are faced with a dilemma. On the one hand they want to protect their margins and to do this they need to pass on at least some of the rise in commodity costs. On the other, they want to protect market share and in order to do this they must stay competitive.
In the end, though, the economics of the global market will be too strong to resist, according to Torlach Denihan, director of Ibec-affiliated trade body Retail Ireland.
“Retailers will try to haggle like hell and get the best value for their customers,” he says. At the same time, “if there’s a world market price, you can’t buck it … I don’t think any entity in the market can set their face against world market trends.”
Independents will be hit harder than multiples
While commodity price rises will affect all retailers to some extent, Vincent Jennings, CEO of the Convenience Stores & Newsagents Association, believes the independent sector will be hit harder than the multiples, which by virtue of their size are in a better position to push back price rises from their suppliers. Jennings also muses that since those suppliers, the big international brands, are already losing market share to own-label, they might in any case decide to absorb the additional input cost themselves rather than pass it on, so as to stay competitive.
The upshot, he says, is that the price-gap between the convenience sector and the multiples “is exacerbated and widened” as a result of rising commodity prices.
Jennings says that within the independent sector there has been “a marked decline in demand” in certain food categories that have been subject to price rises of late, eg, breakfast cereal, and while price is not the sole determinant of buying habits it is bound to be an important factor.
Not all prices are rising
Not that all commodities have witnessed price rises. The price of milk for example has fallen dramatically as a result of the price war between retailers and the influx of cheap product from north of the border. But milk is an exception, argues Jennings. “Milk is a bit different to grain-based products. It’s effectively a domestic product and isn’t affected by rise in commodity prices on the international markets.”
In the face of rising food prices, what strategy should independent retailers adopt so as not to cede more ground to the multiples?
Says Jennings: “I think what you do is, you highlight your difference. You highlight the service end of things. You highlight your opening hours. You highlight your community involvement. You highlight your local employment. They are the areas that you can show to people that you make a difference,” he says, adding that last winter, when many supermarkets were inaccessible due to bad weather, was a timely reminder for people of the value of the local shop.
Cutting down on food waste
Paradoxically, while shortages of cereal and other commodities push up the price of food globally, millions of tonnes of food are being wasted by consumers and businesses every year. This is particularly true of industrialised countries. In the UK, food-waste lobby group WRAP (wrap.org.uk) estimates that £17 billion/18.4 million tonnes per year of food and drink are wasted between the supply chain and households. Furthermore, an average UK household with children spends £50 a month on food that could have been eaten but is thrown away.
A new study conducted jointly by the Swedish Institute for Food and Biotechnology and FAO (Rome) and presented at the recent Interpack 2011 international congress in Dusseldorf, Germany, also finds that a staggering one-third of food produced for human consumption is lost or wasted globally, which amounts to about 1.3 billion tonnes per year.
Unsurprisingly, the report, entitled ‘Global Food Losses and Food Waste’, finds that the developed world is particularly wasteful, with per capita food waste by consumers in Europe and North America standing at 95-115kg/year compared with just 6-11kg in Sub-Saharan Africa and South/Southeast Asia.
The report – which says additional research into food waste is urgently needed – lists some of the probable causes of food waste in industrialised economies:
• Farmer-buyer sales agreements, which may contribute to quantities of farm crops being wasted
• Quality standards set by supermarkets, which reject food items not perfect in shape or appearance
• Poor purchase planning on the part of consumers
• Expiring ‘best-before-dates’
• Uncaring attitude along those consumers who can afford to waste food
• Supermarket promotions such as ‘two-fors’ (two for the price of one) and ‘bogofs’ (buy one get one free) which encourage consumers to buy more than they need.
The Irish government recently introduced new legislation both to curb food waste in business and to comply with the EU Landfill Directive, which requires all European Union member states to reduce the amount of waste sent to landfill.
The Food Waste Regulation (SI 508 of 2009), which came into force in July 2010, means all major sources of food waste, like pubs, hotels, restaurants, canteens, supermarkets and nursing homes, must use a dedicated bin and not mix leftovers with other waste.
Ireland is hoping to cut food waste out of landfill by using anaerobic digestion and improve on the 10% of it which is currently recycled by businesses.
Why prices are rising
As with all commodities, supply and demand is what determines the price of food on the global markets.
On the supply side, a significant dip in production from a major producer can drive prices rapidly higher, as happened last year when Russian/Ukrainian wheat harvests were down 40% on expected levels due to bad weather.
Climate change
Some of the supply problems have been laid at the door of long-term climate change. A recent study in the journal Science found that climate change was responsible for reducing global wheat and corn output by more than 3% over 30 years as compared with what output would have been without the global temperature rise. This translated into 20% higher average commodity prices over the period. The research also found that climate change was depressing yield growth, a situation that would worsen as global temperature rises continued.
Demand
On the demand side, the big price driver is the insatiable appetite for wheat, maize, dairy and meat products from China, India and other rapidly growing economies. According to a newly published report from Oxfam, ‘Growing a Better Future’, the demand for food will rise by 70% by 2050 and prices double within the next two decades. The study also predicts that maize, a staple food in many poor countries, will cost up to 180% more by 2030, with climate change accounting for up to 50% of that price inflation.
Biofuels
The demand for biofuels, too, is having a big impact on global prices, as more and more farmland is diverted to growing cereals to fuel cars rather than feeding people. Biofuels and climate change are identified as the twin drivers of price increases in a report entitled ‘Agricultural Outlook, 2010-2019’, jointly published last year by the Organisation for Economic Co-operation and Development (OECD) and the UN Food and Agriculture Organisation (FAO). The study predicted that average wheat and coarse grain prices would climb by between 15% and 40% in real terms over the next decade compared to their average levels during the 1997-2006 period.
Hedge funds
The short-term impact of big US investment vehicles such as hedge funds is not to be discounted. “There are a lot of outside buyers – not end users or buyers – who are investing in wheat or maize contracts … a lot of the volatility is not driven by the end user but by the investment community,” notes Fintan Conway of the IFA.
Torlach Denihan of Retail Ireland agrees and says the role of financial speculators in the global food market “needs to be looked at.” He argues that if speculators are making a profit on their investments in food contracts, as they are at least some of the time, then someone must be paying for that profit. And, ultimately, that someone is the consumer.
“The profit has to come from somewhere and it has to be paid for all the way down the supply chain ending up at the consumer’s door.”
Irish farmers will benefit
Of course, rising commodity prices are not bad news for everybody. Irish cereal farmers, for example, are one constituency that stands to benefit. When cereal prices fell through the floor in 2008/09 following the massive highs of 2007, many farmers cut cereal production. However, as prices have crept back up they have increased the land under cultivation by 30,000 hectares this year to approximately 285,000 hectares, equating to a 12% rise. If demand continues to rise farmers could soon be back to the mid-2000s scenario of having some 315,000 hectares devoted to cereal-growing.
Conway points out that while prices producers are getting have increased, so too have input costs, notably fuel – up 50% in the past year – and fertiliser, which in 2007 accounted for about 18% of a farmer’s variable costs and is now in the 35-40% range. Conway would therefore argue that fertiliser suppliers and oil companies have benefited as much from the price inflation as farmers.
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