Falling commodity prices to ease food prices later rather than sooner

By Stephen Daniells

- Last updated on GMT

The increase in food prices around the globe will ease later rather than sooner, as benefits of falling commodity prices take time to trickle through the chain.

According to Rabobank, a food and agribusiness lender, sharp falls in both the cost of agricultural and oil-derived products fell during the last six months of 2008 have not been reflected immediately in retail food prices. Indeed, prices continued to rise during the same period.

“This price ‘stickiness’ is a global phenomenon, with the retail costs of food remaining high or adjusting only slowly downwards in most countries around the world at present,” ​said Rabobank’s Australia & New Zealand Agribusiness Reviews, February 2009.

“Agricultural commodity costs have fallen, plastics pricing has started to ease and distribution costs will fall in line with fuel prices. Weak demand conditions will also encourage retailers and processors to reduce prices to keep product moving,”​ added the report.

Anger in Africa

The price stickiness has angered trade unions in South Africa, with the union Solidarity complaining about rising food prices despite falling fuel prices. Fuel prices are 40 per cent lower since June of last year, said Jaco Kleynhans, spokesperson for the union.

The union surveyed the price of a specific basket of products at various retailers, and found that prices rose by seven per cent over the past two months.

Similar rises have been noted in the US. According to the U.S. Department of Agriculture (USDA), food prices rose 5.5 per cent over the last 12 months. This represents a doubling of the 20-year average increase of between two to three per cent.

The outlook is slightly rosier for this year, with USDA economists predicting more stable food prices, rising by between 3.5 and 3.9 percent this year. However, prices could rocket again if energy costs soar again or the economy roars back to life causing an increase in demand for products consumers have cut back on in the deepening recession.

US bearing the brunt?

According to a new report from Companies and Markets, United States Food and Drink Report Q1 2009, food and drink companies across the Atlantic are being adversely affected with falling demand adding to the woes of rising costs of raw materials.

Despite global forces driving down commodity prices, the falls have not yet filtered through fully to a firm’s costs. According to the report, many producers are facing the twin evils of low margins and low demand. Meat producers have suffered most notably, with some posting big losses, and others filing for Chapter 11 bankruptcy protection.

Beverage producers such as PepsiCo and Dr Pepper Snapple Group are also experiencing drops as consumers tighten their belts, said the report.

As consumers change their buying habits, other sectors are experiencing potential benefits, with foods with long shelf-lives, such as frozen and canned goods, experiencing upturns. Also a behavioural change towards eating and drinking at home has provided a boost to a broad spectrum of food and drink firms including those that cater to the breakfast market, such as Kellogg.

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