All you can do is own agricultural stocks and/or learn to trade agricultural futures to profit from your pain ...
------------------------------------------------------- Paying dearly for our needs
Asa Wahlquist | February 28, 2008
GOING to the supermarket has become an increasingly expensive exercise, with no end in sight to the phenomenon of rising food prices.
An international shortage has contributed towards a 68 per cent rise in the price of Australian wheat. Picture: Greg Scullin According to the Australian Bureau of Statistics, in the past five years the food component of the consumer price index has risen 19.7 per cent, compared with an overall 14.8 per cent rise in the CPI. During that period, prices of fruit have risen 27.8 per cent, dairy 23.6 per cent, meat and seafood 13.7 per cent, and bread and cereals 17.5 per cent. The National Farmers Federation-Westpac index for agricultural commodities jumped 22per cent in Australia during the past year and 37 per cent in the US. It reported that demand "shows no sign of abating". Wheat is up 68 per cent, canola up 54 per cent and dairy up 38 per cent.
The Reserve Bank of Australia says increases in food prices have outpaced overall inflation during the past couple of years. "With demand likely to continue to be underpinned by rapid economic growth in developing economies and the trend towards biofuel production, real food prices may remain higher than seen over recent decades for some time," it warns.
Tim Hunt, senior dairy and food retail analyst with food and agribusiness banking specialist Rabobank, predicts we are unlikely to see any significant relief from high food prices "until at least late in 2008, if in fact we see it at all during the year". He adds, however, that Australian consumers "are reasonably well placed to ride out the current wave of food price inflation, by international standards. We spend around 17 per cent of our household incomes on food items."
Although food prices have outstripped inflation, they have fallen behind wages, so in the past 20 years the proportion of the Australian household budget spent on food has fallen from 20 per cent to 17 per cent.
Other countries are worse off. Food prices are rising worldwide and they are hitting the world's poor the hardest. Those who spend 80per cent to 90 per cent of their budget on food are being priced out of the market.
Josette Sheeran, executive director of the UN's World Food Program, has spent the past eight months warning the organisation faces a perfect storm, meaning several factors have combined to exacerbate the situation.
Without an immediate increase of $US500million ($535 million) in the WFP's budget, Sheeran says, a certain proportion of the 73 million people it feeds will miss out.
While drought and strong global demand for grains and dairy have pushed food prices up in Australia, the worldwide rise is being fed by a surge in biofuels, economic growth in developing countries (which has led to an increased demand for grain-fed protein) and urban encroachment on food-producing land.
The most contentious development among these is the rise in biofuels, and the use of food for fuel has attracted widespread criticism. Global biofuel production doubled between 2000 and 2007, from 21.8 billion litres in 2000 to 72.7 billion in 2007. The US has a target of 163.6billion litres of biofuel by 2022.
The US produces 43 per cent of the world's biofuel, mostly from corn; Brazil produces 32per cent from sugar; and the European Union 15 per cent, largely from oilseeds. More than 40 countries have implemented policies to encourage the use of biofuels.
Last year the Organisation for Economic Co-operation and Development produced a report titled Biofuels: Is the Cure Worse Than the Disease?, which addressed the food v fuel debate. It concluded: "The potential of the current technologies of choice - ethanol and biodiesel - to deliver a major contribution to the energy demands of the transport sector without compromising food prices and the environment is very limited." The report found land was required on a significant scale to produce biofuels and this had "put pressure on food and water prices". It also said the biofuels being produced were uneconomic: "In most cases the use of biofuels roughly doubles the cost of transportation energy for consumers and taxpayers."
The NFF's Charlie McElhone explains that a number of US states that have mandated ethanol in petrol "have enormous subsidies for production", resulting in a shift to corn, mainly from cotton and soya beans. The EU is more focused on biodiesel, which McElhone says allows more flexibility: "It can use oilseed crops, or it could use discarded vegetable oil, or tallow, palm oil."
Food prices are also being pushed up by an international wheat shortage. Virtually every wheat-producing area in the world was hit last year by a climatic catastrophe, severely reducing the crop. World wheat stocks are at a 30-year low and demand has exceeded supply in six out of the past seven years. McElhone says global prices have a big effect on domestic prices, with Australia exporting 70 per cent of its agricultural production.
However, Australia is not suffering to the same extent as other countries. Hunt says food price inflation has been lower in Australia than many parts of the world, for several reasons.
"One is that as a surplus producer of most food products, while the cost of products goes up when we have drought, we don't generally have severe shortages," Hunt says.
The second reason is that the high Australian dollar reduces the cost of imported food and means exporters get less money, making the domestic market more attractive. The third is retail competition.
"Supermarkets are competing vigorously at price level for business and that has helped to keep a lid on retail price inflation," he says.
Woolworths chief executive Michael Luscombe said on Tuesday his company would spend more than $100 million this year to hold back rising food costs. However, he said food inflation was likely to continue.
"I think it's going to be with us for a couple of years, particularly if the globe's thirst for biofuels continues," Luscombe says. "(You'll) find that demand for soy, maize and wheat continues to increase."
Hunt says the margins of food manufacturers have also been squeezed. "While the cost of the food component of the products we eat has gone up significantly, the costs of other things have also risen: the cost of processing, the cost of packaging and the cost of distributing have risen," Hunt says. He points out dairy prices, which in Australia have been affected by drought and international demand, went up 9 per cent here, but in the US and Britain the increase was more than 20 per cent.
"That is really an illustration of vigorous price competition between retailers," Hunt says. "Woolworths has been reluctant to increase the cost of its private label milk as fast as they could probably justify on the basis of cost because that is an important traffic builder for their stores and the cheaper they can keep it relative to their competitors, the more business they will get."
He agrees Australian consumers can expect more food price pain ahead. "Not all the increases in the ingredient costs have been passed on at this stage to consumers. They are yet to feel the full brunt of the seismic shifts we have seen in international markets.
"There are further price increases to come. There are delays in renegotiating supply contracts, food manufacturers tend to pass through these increases gradually so they don't damage demand for their products, but food manufacturers will only wear reduced margins for so long."
Hunt nominates dairy as the area likeliest to be hit by price rises, adding that there are "quite possibly more to come across grain-based products".
Lyndon Pfeffer, grains president with the Queensland farmers group AgForce, says grain growers were frustrated with rises of up to 70c cents a loaf of bread being blamed on high grain prices. He says the rise in grain prices came down to about 10c a loaf. "If wheat is $200 a tonne, it costs 10.7c a loaf. If it is $250 a tonne, as it was 12 months, ago that's 11.35c a loaf; and if it is $400 a tonne, then it costs 21.4c a loaf." Pfeffer argues the price rise has more to do with fuel, energy and labour costs and other inputs.
The RBA points out that in the past droughts had little effect on the cost of food, but this drought has been different: "The sustained rise in the relative price of food in the current drought can largely be explained by the fact that a broader range of food items has been affected by this drought than in previous episodes."
High grain prices have dramatically reduced the number of cattle being grain fed. Drought has also pushed more cattle and sheep on to the market, resulting in price declines last year, according Meat and Livestock Australia's Peter Weeks. "I fully expect retail prices to rise this year, particularly for lamb and to some degree for beef as well," he says.
Instead of being fed grain for 300 days, cattle are spending shorter periods - 50 to 80 days - on grain. That means beef prices are likely to go up or quality will come down.
Hunt says that in other parts of the world rising food prices have lead to governments implementing a raft of measures, "including banning or taxing food exports, slashing tariffs on food imports to reduce the cost of imported food, regulating or completely freezing the price of staple food items or increasing subsidisation of basic food products."
He says Argentina and India introduced bans or taxes on exported products such as wheat, milk powders and beef, Russia has frozen the prices of staple food items. Food manufacturers in China and Thailand must negotiate any proposed food price increase with the government, and Algeria and Saudi Arabia have increased food subsidies.
The Australian policy response has been comparatively restrained. "While nowhere near as high on the political agenda as offshore, food pricing was to some extent an election issue," Hunt says.
Last month the Rudd Government directed the Australian Competition and Consumer Commission to hold a public inquiry into the competitiveness of grocery prices in Australia. It will report by July 31.
