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Special edition: Reformulation

The lowdown on commodity prices, what they mean for food prices in 2013, and why 2012/13 is not going to be a repeat of 2007/8

1 commentBy Elaine WATSON , 14-Dec-2012
Last updated on 18-Dec-2012 at 16:32 GMT

“While you can look at one specific cost and you can say it's gone down, I could give you a story for another raw material where it's gone up”, observed Unilever’s chief financial officer Jean-Marc Huet when asked about commodity prices during the firm’s latest earnings call.

In the previous 10 months alone, he pointed out, “crude oil has been as high as $125 per barrel then as low as $90 and now back up to $110, with similar swings in a number of our other commodities.

“Look at cocoa. Look at tea. Look at different types of oils”, he added. “So what is happening today may not be a good indication of what will happen tomorrow…

“And there are other sorts of volatility that we face, be it conflict in the Middle East, serious inflation in the Southern Cone, South America or the effect of weather patterns we have not seen before.”

Unilever: In the long term, we just assume commodity prices will continue to rise

Jean-Marc Huet: The only certainty is uncertainty...

“[But ] over the longer term”, he said, “we just assume that they [commodity prices] will continue to rise".

Few agricultural economists would probably dispute the latter statement, citing multiple factors including the diversion of feedstocks into biofuels, population growth, climate change, a weakening US dollar, rising meat and dairy consumption in emerging markets and rising energy costs.

But what about the more immediate future? Can we make any firm predictions about the next few months or years, as opposed to decades? And what impact will this summer’s drought in the US and South America have on prices on the shelf?

US retail food price inflation expected to increase to 3-4% in 2013

Richard Volpe, an economist at the US Department of Agriculture (USDA’s) economic research service (ERS), says sharp jumps in the price of corn and soy have hit feed prices which in turn have pushed up the price of poultry, and beef & veal on the shelf - with 2012 US retail price forecasts for these up 5-6% and 5.5-6.5% respectively.   

However, overall, retail food price inflation has averaged 2.5-3% each year on average for the past 20 years, and 2012 is no different, he points out, with increases in the price of animal products such as eggs, meat, and dairy partly counterbalanced by a drop in prices of fresh fruits and vegetables owing to better growing weather, to create an estimate of 2.5-3.5% food price inflation.

Next year, he predicts, retail food price inflation is expected to be a little higher at 3-4%, but this is still well below the inflationary spike in 2007/8.

If the farm price of corn increases 50%, retail food prices typically rise 0.5%-1%

Private labels typically benefits if retail prices rise

As for packaged foods containing corn-based ingredients such as high fructose corn syrup, even quite large increases in corn prices will not necessarily drive big changes on the shelf, he predicts, noting that if the farm price of corn increases 50%, the Consumer Price Index (CPI) typically only increases by 0.5 to 1%.

Who takes the margin hit when costs rise?

But who are the winners and losers when retail prices go up? While demand is remarkably inelastic overall, says Volpe, consumers do typically switch to buying more private label products when prices rise on shelf, and then continue to buy them when prices go down again.

As for who takes the biggest hit when costs go up, it’s hard to say definitively, he says.

However, with power becoming more concentrated in the hands of fewer retailers, it seems likely that food and beverage manufacturers and their suppliers will increasingly be expected to absorb more of the costs as retailers become more powerful, and more reluctant to raise prices to consumers, he predicts.

“Supermarkets are increasingly hesitant to pass costs on to consumers.”

In many production areas in the world it’s just been too hot, too wet or too dry

Ron Trostle, an agricultural economist at ERS, says that while the growing population, higher energy prices and other factors have pushed up food prices since 2002, production will rise to meet demand in the short term.

However, this cannot continue indefinitely as there is only a finite amount of agricultural land available, he acknowledges.

“We’ll probably see a drop in the price of some crops in the next 2-4 years, although I think meat prices will probably continue to go up in the next couple of years.”

In the meantime, erratic weather is more of an issue, he says.

“In many production areas in the world it’s just been too hot, too wet or too dry. Take wheat, which is very weather dependent. If we don’t get average precipitation between now and March, we’ll have a very poor winter wheat harvest over many of the southern plains of the US.

“However, we could see big increases in Argentina, Russia and Australia, so it’s very hard to predict.”

IMF: The current food price shock is less severe than that of 2007–08

IMF: The share of the US corn crop going to fuel use has declined noticeably with the expiration of government support for the ethanol industry

According to the IMF’s latest commodity market review, “the current food price shock is less severe than that of 2007–08 because it has not affected all key crops uniformly and has not been aggravated by trade restrictions and high energy input costs…

It added: “Since the last food crisis, supply has responded to robust demand and relatively high prices through higher acreage and yields as well as productivity gains.”

Compared with the 2007–08 food crisis, global stock-to-use ratios have improved for rice and wheat but deteriorated for soybeans and to a lesser extent for corn and other grains and oilseeds, it added.

However, the share of the US corn crop going to fuel use has declined noticeably with the expiration of government support for the ethanol industry.

FAO food price index down 1.5% 

Meanwhile, the FAO food price index (published Dec 6) averaged 211 points in November 2012, down 1.5% from October and the lowest since June 2012.

Except for dairy, international prices of all the commodity groups included in the Index fell, with sugar undergoing the sharpest dip, followed by oils and cereals.  The decline puts the November index value nearly 3% below one year ago.

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1 comment (Comments are now closed)

future trading

Future trading has damaged the price structure of bot agricultural products oil and other commodity prices. worst effected are gold and oil. No one can repair the system

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Posted by g bhaskara ramam
16 December 2012 | 16h29

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