Australia’s food price inflation fuelled by global shortage and rising supply chain costs

Australia’s latest official inflation figures show food prices continued to rise strongly in the March quarter, as consumers felt the sting of rising supply chain costs, local product shortages and a global shortfall of critical food staples, according to international food and agribusiness banking specialist Rabobank.

The Australian Bureau of Statistics Consumer Price Index (CPI) data shows the food price index rose by 2.1% in the March 2008 quarter. Overall inflation rose by 1.3% for the quarter. On an annual basis, food prices rose by 5.7%, with overall inflation increasing by 4.2%.

Rabobank Food & Agribusiness Research senior analyst Tim Hunt said the latest food index figures represented the continuation of a sustained run of broad-based and vigorous food price inflation that may still have several months yet to run.

Causes

Mr Hunt said food price inflation continued to be driven by a number of factors, including increased price of food ingredients and other supply chain costs.

The primary cause is a sharp rise in the costs of food ingredients due to three key influences — strong pricing for agricultural commodities in international markets, local product shortages (brought about partly by drought) and the increasing costs of producing many food products due to sharp increases in the cost of feed grain, fertiliser and water,” he said.

However, Mr Hunt said, food price inflation in developed countries like Australia was not exclusively an agricultural story.

“The underlying cost of raw food ingredient in the products we eat is an important component in the end price we pay at retail level — but it’s not the only cost, and in some cases not even the main cost. Most products undergo some degree of processing, packaging, distribution and marketing and the cost of these activities has also been pushed up on the back of rising prices for energy, fuel, capital and plastic and aluminium,” he said.

“Food processors, distributors and retailers are therefore facing rising costs on almost every front that are at least in part being passed on to consumers.”

Mr Hunt said food price inflation may well have been even greater, had it not been for a rising Australian dollar, which continues to act to soften price pressure for both imported and exportable products.

Current food inflation levels

Mr Hunt said “the current bout of food inflation is distinguished by its vigorous and sustained nature and its breadth”.

“Food prices increased by 2.1% on the previous quarter (almost double the 1.3% rate of general inflation). And with several quarters of strong price growth in the past year, the food price index is now a substantial 5.7% above previous year levels and up 11% from two years ago.”

Mr Hunt said prices rose across almost all food categories, including vegetables, dairy, meat, bread and cereals and restaurant and takeaway meals.

A key development in the March quarter was the further extension of inflation beyond its already very broad base to also encompass the red meat ‘complex’ and takeaway food.

“Through 2007, the price of beef and veal in particular had been relatively stable — with the potential impact of rising feed grain costs on retail prices more or less offset by increased supply as stock was turned off during the drought. With livestock numbers now stabilising, lower herd numbers and ongoing high feed costs are starting to filter through the market,” Mr Hunt said.

Food service operators in the restaurant and takeaway channels appear to be increasingly passing on rising costs to customers as their supply contracts are renegotiated and the likelihood of a sustained period of higher costs becomes increasingly clear.

Outlook

Mr Hunt said strong food price inflation was expected to continue well into the second half of 2008.

“Not all recent increases in ingredient cost have at this stage been passed on to consumers due to delays in renegotiating supply contracts, hesitancy to push through price increases too quickly for fear of denting demand, and vigorous price competition between retailers. This has put considerable margin pressure on the Australian food processing sector, which will continue to work hard to relieve this in coming months,” he said.

A return to improved seasonal conditions in the 2007/2008 growing season would improve local supply of several products in the latter months of 2008.

However, with irrigation water likely to remain in short supply and global commodity markets expected to remain tight, the underlying cost of most agricultural products is also expected to remain firm. Any stabilisation or softening of the Australian dollar would further contribute to food price inflation.