food inflation on its way?

There is nothing worse for a grocery retailer than price deflation. Essentially you end up having to sell more unit volumes to reach the same Revenue number.

Looking at WOW's last 3 half years price deflation in Food & Beverage has been reported as follows;

H1 2011 3.8%
H2 2011 3.7%
H1 2012 4.4%

Some of this deflation has been through Coles & Woolies reducing pricing to compete with each other, as well as seasoning aspects through produce over supply etc.

I believe there are two reasons why WOW and WES have both performed well of late. Firstly it is due to investors moving capital into secure defensive Blue chip stocks -this can be seen through other companies outside this sector as well eg RHC, RMD, CSL, CCL

Secondly I believe that we are on the verge of seeing some significant food inflation as we move through the 1st & 2nd qtrs of 2013 (Calender year) due to rampant increases in costs of grains worldwide primarily (but not sigularly) due to the US maize crop that has been decimated by the worst drought since 1956.

The forecast US maize crop has been cut by 60m tons and carryover stocks are expected to be at 6 year lows. On top of this the US Soya crop has been cut by 8.5m tons. Wheat output has also been scaled back in Kazakhstan, Ukraine and Russia reducing product available for export.

Australia's grain crop in 2012/2013 is forecast at 36m tons down from last years 43m tons. Domestic wheat prices have increased 25% in the last two months and look like they will continue to climb on the global grain outlook.

Nothing can stimulate food inflation like an increase in the price of grains. Not only does Wheat have a direct effect on Bread, Cereals, biscuits, flour, cakes etc but it is also a key feed component (as well as corn and soya) in Animal feeds.

Eggs, Chicken, Pork are all on the verge of seeing significant price increases.

Not good when you buy your weekly groceries but great for retailers who increase real $ margins on items and also have the opportunity to creep margins a little through the increases.