Oil price falls to cut food production costs

By Michael Stones contact

- Last updated on GMT

Falling oil prices will cut food manufacturers' production and distribution costs: Rabobank
Falling oil prices will cut food manufacturers' production and distribution costs: Rabobank

Related tags: Food prices, Petroleum

Food manufacturers will benefit from lower production and distribution costs as the tumbling price of oil drives down global food prices, according to a new report from multi-national banking group Rabobank.

“The price declines of both oil and agri commodities will contribute to lower costs for food production, and in the current global macro-economic climate, Rabobank expects this will eventually lead to lower consumer food prices … ,”​ said the bank. Some sectors and regions will benefit from lower costs for longer, it added.

‘Reaching multi-year lows’

The prolonged fall in the price of oil will help to drive food prices to historic lows, said the bank’s Clara van der Elst. “The size of the drop in oil prices combined with the already significantly lowered agri-commodities will place substantial downward pressure on global food prices, possibly reaching multi-year lows,”​ she said.

While lower food prices will be welcomed by consumers, no significant rise in consumption was predicted, due to the relatively low price and income elasticity (demand response to price) of food and drinks.

Sectors gaining most from low energy costs

  • Horticulture
  • Milk powder
  • Coffee
  • Potato processing
  • Beer production

“Food is relatively inelastic, so lower food prices will drive up volumes mostly for upmarket food and drink and in developing regions, where food is a bigger part of household spending,”​ predicted the report. “From a demand perspective, Rabobank expects the biggest volume increase to be through upmarket food and beverage consumption such as foodservices, wine and spirits, beef and pork, exotic fruits and fruit juices.”

More important energy cost

For the global food and agriculture industry, oil is not a major cost factor and lower prices will provide a limited benefit to margins, said Rabobank. While oil costs influence food production costs – from farm machinery and animal feed costs to distribution to packaging – natural gas was a more important energy cost.

Food and beverage sectors with the most to gain were those with high gas consumption, such as horticulture, milk powder, coffee, potato processing and beer production. “Costs are likely to be lowered and margins improved, at least initially,”​ according to the bank.

“Some of the upside will eventually be passed downstream in the value chain, initially to processors, then to retailers and finally-driven by competition, to the consumer.”

For the sector overall, lower oil prices could fuel a bigger transport radius, particularly for fresh products.

Meanwhile, global oil prices remained stable between 2010 and mid 2014 at about $110 a barrel. But in the past eight months, prices have more than halved, with Brent crude oil falling to below $50 a barrel. US crude is now $48 a barrel.

Price falls have been driven by weak demand, due to lacklustre global growth, and a big increase in US production. Also, the Organisation of Petroleum Exporting Countries (OPEC) has decided not to support prices.

Russia, a major exporter of oil and gas, has been hit particularly hard by tumbling prices.

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