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How much will this summer’s drought impact food prices in 2013?

By Elaine WATSON , 06-Nov-2012
Last updated the 05-Nov-2012 at 23:27 GMT

While the cost inflation situation has eased recently eased for many food manufacturers, summer drought conditions are widely expected to put renewed pressure on food prices in 2013.

But how much could prices go up, and when will price rises kick in at the shelf?

Drought could increase retail prices for beef, pork, poultry, and dairy products first  

The US Department of Agriculture (USDA’s) economic research service (ERS) predicts we will see the earliest impacts on meat, poultry and milk.

In its latest update on food prices, the ERS says: “The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products first and foremost - later this year and into 2013.

“But in the short term, drought conditions may lead to herd culling in response to higher feed costs, and short term increases in meat supply. This could decrease prices for some meat products in the short term. That trend would reverse over time after product supplies shrink."

But it adds: “The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour) will likely take 10-12 months to move through to retail food prices.”

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

Historically, if the farm price of corn increases 50%, retail food prices as measured by the Bureau of Labor Statistics (BLS) in the Consumer Price Index (CPI) increase by 0.5 to 1%, says the ERS.

To put this into perspective, commodities typically make up less than 15% of the average value of retail food purchases, so even if all commodity prices doubled, prices on the shelf would increase by no more than 15%, it explains.

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

“Retail food price inflation has averaged 2.5-3% each year on average for the past 20 years, and 2012 is no different.

“Next year, we will likely see a slight increase above those historical averages when food price inflation is expected to be 3-4%, with increases centralized in animal products such as eggs, meat, and dairy.

“That forecast… is currently below some of the recent inflation spikes in 2004, 2007, 2008 and 2011.”

Symphony Consulting: There is a lot of apprehension about what will happen

Speaking to FoodNavigator-USA about cost inflation last month, Symphony Consulting managing director Dr. Krishnakumar Davey said: Meat prices are likely to go up in the next three to four months, but we’ll only know in the next few months how the drought will impact food prices next year.

"I think there is a lot of apprehension about what will happen.”

Hershey: Cocoa up, peanuts and sugar improving, dairy very volatile

Hershey: Cocoa is a little higher than it was recently...

Asked about cost inflation in its Q3 earnings call, Hershey chief financial officer Humberto Alfonso said that his buying team reported a mixed bag when it came to cost inflation.

He added: “Cocoa is a little higher than it was recently… But peanuts are a little better, sugar is a little better, dairy is the one that's going the other way based on higher corn. But overall, I would say even energy, the basket itself is a bit more stable to down.”

Unilever: What is happening today may not be a good indication of what will happen tomorrow

In its Q3 results earnings call, Unilever executive director and chief financial officer Jean-Marc Huet said commodity costs remained very unpredictable, but said that "over the longer term, we just assume that they will continue to rise".

Unilever CFO Jean-Marc Huet: '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'

He added: “Over the last 10 months alone, 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 that are particularly relevant for us.

“Look at cocoa. Look at tea. Look at different types of oils. 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.

“And there are other sorts of volatility that we face today, be it the impact of conflict in the Middle East, serious inflation in the Southern Cone, South America or the effect of weather patterns that we have not seen before. So what is happening today may not be a good indication of what will happen tomorrow.”

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