Last year a whole host of commodities rocketed in price and this year the upward pressure on retail prices continues to mount. How bad will it get, asks Julia Glotz
The most expensive UN food basket since records began. Food riots in Algeria. Weather-ravaged harvests.
Two weeks into the new year, and mounting concerns about food security and rising food prices are already dominating much of the political and economic agenda. Add to that a price of almost $100 for a barrel of Brent Crude, the recent rise in VAT and a prospective duty hike on alcoholic drinks, and it is no surprise that the fmcg sector and consumers are bracing themselves for significant price increases on many food items. But which foods will be the hardest hit?
Last year, it was wheat-based products that nabbed most of the headlines. And no wonder. Prices rose sharply between June and December, when London wheat hit £200/tonne for the first time, putting pressure on makers of wheat-based products as well as poultry, egg and meat farmers for whom grain is the biggest cost factor. However, this year, although wheat will again be one to watch, it is maize (corn) that is expected to dictate the pricing agenda.
Inventory stocks are "precariously low" this week's lower-than-expected USDA forecast is a case in point yet global demand, particularly from China, is rising rapidly, say analysts at Rabobank, the leading agricultural lender. It is forecasting that prices soar to $5.80 a bushel in the second quarter of 2011 63% up on the second quarter of 2010.
Maize will be "in the driver's seat" as far as grains and oilseeds are concerned, they predict, and will " set the pace of price momentum of other crops competing for acreage in 2011."
This is partly because of maize's close links to the biofuels market and, by extension, to the price of crude oil. Coupled with the large amounts of fertiliser needed to grow it, it means the crop is especially sensitive to increases in energy costs while, at the same time, demand for it is far less affected by price than is the case with other grains and oilseeds.
That said, energy prices are set to increase in importance for agricultural commodities across the board. Take sugar. Like maize, it is used to produce ethanol, making price hikes likely whenever energy costs rise, while oilseed crops such as rapeseed and soyabean are used in biodiesel production. In addition, oil has a natural link to commodities because it accounts for a large proportion of input costs.
That link is set to become even stronger in 2011, believes Rabobank: "We look for higher energy prices in 2011 to be a catalyst for higher agricultural prices."
Nick Peksa, sales manager at Mintec, agrees oil will become more important for global food prices. "If the price of crude continues upwards, we are likely to see lots of speculative activity around crude and its derivatives, such as packaging materials and fuel," he says.
Significant price rises are expected for edible oilseeds such as soyabeans, palm, rapeseed and coconut oil. Prices for these oils were already on the up in 2010, leading to price hikes of up to 20% for products such as vegetable cooking oil and vegetable spreads. Growing Chinese demand as well as the link to biofuels and crude oil are again key factors, with soyabeans leading the way and likely to set the pace for many other oilseeds in 2011.
As for wheat, stocks and production look to be more closely matched this year despite the shocks suffered as a result of the severe droughts that destroyed much of the Russian and Ukrainian harvest in 2010. "There was lots of talk about wheat shortages, but in reality there were shortages only in certain parts of the world, such as Russia," says Peksa. "If we are free from extreme weather in the major wheat-growing regions, the price of wheat will go down slowly, although it will not go back to pre-2010 levels, because markets don't reset that quickly."
High price volatility does, however, remain a distinct possibility for wheat, whose politically sensitive status makes it a prime target for government intervention.
For sugar and cotton, meanwhile, two of the most talked-about commodities of 2010 (aside from wheat), things start looking up later in the year.
Kona Haque, commodity strategist at Macquarie Bank, says she is expecting a "year of two halves" for the two commodities, with prices staying high in the first half of 2011 followed by lower prices in the second half when global stocks will have been replenished. Lower sugar prices would come as some relief to manufacturers of chocolate and confectionery products, which are already exposed to the triple whammy of high cocoa and lentic oil (palm and coconut) prices as well as falling into one of the few food categories affected by the new 20% VAT rate.
What will be interesting to see is the extent to which higher commodity prices will translate into higher retail prices this year. The prices of some products have already gone up, but supply chain contracts can often mean it takes a while for higher commodity prices to filter through. In addition, supermarkets have been fighting hard to ensure as little as possible in increased costs is passed on to consumers. "In the end, it's often the farmer who pays, because he's at the bottom of the supply chain," says John Giles, divisional director at consultancy Promar International, a view many farmer and producer organisations that have recently been calling for higher prices to offset last year's feed grain hikes echo.
"We have the UN saying food prices are at their highest since the 1990s, and at the same time you've got someone like Asda coming out saying they're going to be 10% cheaper than anyone else," says one poultry industry executive. "What kind of message does that send out to the consumer?"
Unfortunately, there is unlikely to be significant downward momentum in commodity prices, says Giles, as many of the fundamental issues that drove the commodity-driven price rises of 2010 remain. Hunger for agricultural commodities from BRIC countries continues unabated, demand for biofuels is booming, the price of oil remains high and further disruptive weather is expected courtesy of La Niña.
Some of the cost hikes will be absorbed by retailers, others by manufacturers, but farmers will have to do their bit too, warns Giles. Efficiency will be key to being "best in class" rather than "rest in class", he says. "In a nutshell, farm a bit bigger, buy a bit smarter, sell a bit higher," he advises. "Don't think you can continue as you are. It's time to be as well informed as possible, and for bold action."
The most expensive UN food basket since records began. Food riots in Algeria. Weather-ravaged harvests.
Two weeks into the new year, and mounting concerns about food security and rising food prices are already dominating much of the political and economic agenda. Add to that a price of almost $100 for a barrel of Brent Crude, the recent rise in VAT and a prospective duty hike on alcoholic drinks, and it is no surprise that the fmcg sector and consumers are bracing themselves for significant price increases on many food items. But which foods will be the hardest hit?
Last year, it was wheat-based products that nabbed most of the headlines. And no wonder. Prices rose sharply between June and December, when London wheat hit £200/tonne for the first time, putting pressure on makers of wheat-based products as well as poultry, egg and meat farmers for whom grain is the biggest cost factor. However, this year, although wheat will again be one to watch, it is maize (corn) that is expected to dictate the pricing agenda.
Inventory stocks are "precariously low" this week's lower-than-expected USDA forecast is a case in point yet global demand, particularly from China, is rising rapidly, say analysts at Rabobank, the leading agricultural lender. It is forecasting that prices soar to $5.80 a bushel in the second quarter of 2011 63% up on the second quarter of 2010.
Maize will be "in the driver's seat" as far as grains and oilseeds are concerned, they predict, and will " set the pace of price momentum of other crops competing for acreage in 2011."
This is partly because of maize's close links to the biofuels market and, by extension, to the price of crude oil. Coupled with the large amounts of fertiliser needed to grow it, it means the crop is especially sensitive to increases in energy costs while, at the same time, demand for it is far less affected by price than is the case with other grains and oilseeds.
That said, energy prices are set to increase in importance for agricultural commodities across the board. Take sugar. Like maize, it is used to produce ethanol, making price hikes likely whenever energy costs rise, while oilseed crops such as rapeseed and soyabean are used in biodiesel production. In addition, oil has a natural link to commodities because it accounts for a large proportion of input costs.
That link is set to become even stronger in 2011, believes Rabobank: "We look for higher energy prices in 2011 to be a catalyst for higher agricultural prices."
Nick Peksa, sales manager at Mintec, agrees oil will become more important for global food prices. "If the price of crude continues upwards, we are likely to see lots of speculative activity around crude and its derivatives, such as packaging materials and fuel," he says.
Significant price rises are expected for edible oilseeds such as soyabeans, palm, rapeseed and coconut oil. Prices for these oils were already on the up in 2010, leading to price hikes of up to 20% for products such as vegetable cooking oil and vegetable spreads. Growing Chinese demand as well as the link to biofuels and crude oil are again key factors, with soyabeans leading the way and likely to set the pace for many other oilseeds in 2011.
As for wheat, stocks and production look to be more closely matched this year despite the shocks suffered as a result of the severe droughts that destroyed much of the Russian and Ukrainian harvest in 2010. "There was lots of talk about wheat shortages, but in reality there were shortages only in certain parts of the world, such as Russia," says Peksa. "If we are free from extreme weather in the major wheat-growing regions, the price of wheat will go down slowly, although it will not go back to pre-2010 levels, because markets don't reset that quickly."
High price volatility does, however, remain a distinct possibility for wheat, whose politically sensitive status makes it a prime target for government intervention.
For sugar and cotton, meanwhile, two of the most talked-about commodities of 2010 (aside from wheat), things start looking up later in the year.
Kona Haque, commodity strategist at Macquarie Bank, says she is expecting a "year of two halves" for the two commodities, with prices staying high in the first half of 2011 followed by lower prices in the second half when global stocks will have been replenished. Lower sugar prices would come as some relief to manufacturers of chocolate and confectionery products, which are already exposed to the triple whammy of high cocoa and lentic oil (palm and coconut) prices as well as falling into one of the few food categories affected by the new 20% VAT rate.
What will be interesting to see is the extent to which higher commodity prices will translate into higher retail prices this year. The prices of some products have already gone up, but supply chain contracts can often mean it takes a while for higher commodity prices to filter through. In addition, supermarkets have been fighting hard to ensure as little as possible in increased costs is passed on to consumers. "In the end, it's often the farmer who pays, because he's at the bottom of the supply chain," says John Giles, divisional director at consultancy Promar International, a view many farmer and producer organisations that have recently been calling for higher prices to offset last year's feed grain hikes echo.
"We have the UN saying food prices are at their highest since the 1990s, and at the same time you've got someone like Asda coming out saying they're going to be 10% cheaper than anyone else," says one poultry industry executive. "What kind of message does that send out to the consumer?"
Unfortunately, there is unlikely to be significant downward momentum in commodity prices, says Giles, as many of the fundamental issues that drove the commodity-driven price rises of 2010 remain. Hunger for agricultural commodities from BRIC countries continues unabated, demand for biofuels is booming, the price of oil remains high and further disruptive weather is expected courtesy of La Niña.
Some of the cost hikes will be absorbed by retailers, others by manufacturers, but farmers will have to do their bit too, warns Giles. Efficiency will be key to being "best in class" rather than "rest in class", he says. "In a nutshell, farm a bit bigger, buy a bit smarter, sell a bit higher," he advises. "Don't think you can continue as you are. It's time to be as well informed as possible, and for bold action."
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