Food price inflation: second highest in the EU

By Graham Holter

- Last updated on GMT

Related tags: Inflation

Sugar prices are now 10% down from their July peak
Sugar prices are now 10% down from their July peak
UK consumer inflation on food is the second highest in the EU – up 6.4% while world commodity prices are falling.

Figures for September, published by the Organisation for Economic Co-operation & Development (OECD), reveal that UK food prices are rising more quickly than all EU countries except Hungary. They are also rising faster than the Consumer Price Index which measures general inflation.

Yet the United Nations Food & Agriculture Organisation (FAO) reports that food commodity prices were down 4% between September and October, and have fallen 9% since February.

Cereal prices fell 5% in October, oils and fats were down 6% and meat was down marginally. But they remain 12% more expensive than a year ago.

Dairy was down 5% in the month and is now on a par with the same period in 2010. Sugar was also down 5% and is now 10% cheaper than its July peak.

The FAO figures may seem at odds with the OECD data but Martin Deboo, analyst at Investec Securities, is unsurprised that UK consumers are failing to benefit from cheaper raw materials.

“My read on soft commodity prices is they’re coming off a bit, but not that much,”​ he told FoodManufacture.co.uk.

Oil price

“Although the food industry is focused on soft commodities, its main dependence is on the oil price because it needs fuel and distribution – and that’s not off that much.”

Deboo added that fluctuations in material costs take time to filter through.

“Most multinational food producers will have bought forward and be well hedged on their commodities,”​ he said. “As a rule of thumb, you’re looking at a two quarter lag before cost reductions come through.

“The turn, which was a very modest one, happened around August so we’re some way away from seeing that in manufacturers’ profit and loss accounts.”

The Food and Drink Federation (FDF) confirmed that consumer food price inflation represents retail price levels rather than factory-gate (producer) prices. Price inflation is being driven by wider economic conditions and seasonal supply changes, it said.

Although consumer food price inflation stood at 6.4% in September, this is significantly below the levels seen in 2008 which peaked at 13%.

“Food producer prices tend to move slowly relative to the underlying agricultural commodity prices,”​ said an FDF spokeswoman. “The time lag which exists between food producer and commodity prices is often the result of fixed-term contracts with suppliers (forward buying) and futures contracts traded on commodity exchanges (hedging).”

Meanwhile, might producers be tempted to maintain higher prices in order to make up for weaker trading during the economic downturn? Deboo said: “It’s the retailers who set the prices and there are always conflicting motives here.

“Given the weak consumer environment, there will be a desire across the supply chain to keep pricing keen. But everyone is looking for like-for-like growth. The market likes to see a robust top line and you have the opportunity to manipulate that a bit with pricing.”

Volatile

The FAO warned that commodity prices “still remain generally higher than last year and very volatile”.

It added: “The drop was triggered by sharp declines in international prices of cereals, oils, sugar and dairy products. Meat prices declined the least.

“However prices last month were still some 5% above the corresponding period last year.”

The FAO said deflation was being caused by improved supply of some commodities, and uncertainty about global economic prospects. But that was being counteracted by stronger demand from emerging countries. It predicted that “most agricultural commodity prices could remain below their recent highs in the months ahead.”

Deboo dismissed the suggestion that price volatility could prove a turn-off for investors. “The hard evidence is that by and large the big branded players have demonstrated, in two waves of consumer inflation, that they recover with minimal damage to margins – and investors are aware of that fact,”​ he said.

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