Food prices: up, up?

Now this tide is turning after many years. Food prices are on the rise.

"The fight for the consumer has seen prices remain “down, down” for many years and a disconnect growing between the price at the check-out, the saleyard and food processor.”

It might seem a given that food prices would go up following a sustained period of drought combined with growing demand for agricultural exports. Yet while those factors are certainly playing a role, offsetting those drivers has been the fight for market share between Australia’s major supermarkets as new competition entered Australia.

That fight for the consumer has seen prices remain “down, down” - and a disconnect growing between the price at the check-out, the saleyard and food processor.

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Food bill

The price of food has always been a major slice of consumer wallets - yet the trend in recent decades across most developed countries has been for less and less consumer income being spent on food. Indeed, the general rule is the more developed a country, the less its people spend on food.

At last look, Australia was one of only 10 countries that spend less than 10 per cent of its income on food. Much of this stems from the increasing food security and supply that comes with an advanced agricultural sector, as well as changing tastes and priorities for higher income earning consumers.

When looking at the other areas where the Australian consumer can spend, it is clear that spending on, and the cost of, education, health and housing have advanced strongly while communication and clothing costs are at or near the same levels they were in the early 1990s.

Food prices sit somewhere in between showing strong price increases - above even the cost of housing - until around 2010 when food price growth slowed substantially.

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Taking a hit

Up until 2014, food prices tended to move in concert with the cost of raw agricultural produce and the outputs of food manufacturing.

Supermarket price wars appeared to break this connection as $A1 milk and Coles’ “down, down” prices took impact. As farmers’ prices increased strongly - consumer prices remained flat.

Most of this margin was being lost to food processors, while supermarkets margins have taken a smaller hit.

All indications are that this period of an artificial ceiling on food prices is about to change.

In the first three quarters of 2019, food prices grew at a faster rate than the general consumer price index (CPI) as supermarkets followed through on their public announcements that competition for market share was shifting away from purely price based competition and towards other methods including loyalty benefits and collectibles.

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Food prices obviously vary between types of food, level of manufacturing and seasonal availability - for instance, increases in the cost of livestock, particularly cattle and sheep, have led to large increases in the price of red meat.

It is interesting to note, however, that while the price of livestock in the saleyard has continued to increase past 2014, the price of manufactured or processed meat dropped off in 2016 and didn’t surpass 2016 again until the March quarter in 2019. Unsurprisingly, retail beef prices maintained the 2014 price increases throughout that drop-off in manufactured meat prices.

Similarly, while the farmgate price of vegetables has shown no net growth since the early 2000s, retail vegetable prices have grown almost as strongly as beef and lamb. Comparing the stages of production for individual product lines indicates retailers make their largest margins in both fresh products such as fruit and vegetables. They take far lower margins on products such as milk and breakfast cereals.

Now the signposts point to stronger retail food prices: farmgate and processor output prices have all jumped strongly in recent quarters across almost all food types and while the end of price wars has been reflected in increases in food CPI above the general economy-wide CPI, all indications are that there are many more to come.

What remains unclear is how far retailers are prepared to go in increasing prices and what - if any - flow on effect will this have on farmgate prices and processor margins.

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As retailers loosen the reins on prices in categories such as fresh produce and processed grains, will that result in a stronger farmgate price for producers of those products? Or will retailers retain any increased margin in their bottom line?

Madeleine Swan is Associate Director, Agri Research at ANZ