The price of food commodities is rising, The Grocer can reveal. Sharp falls in the pound have minimised or reversed the effect of falling world commodity prices, leading the average price of food commodities tracked by The Grocer to rise 4.5% since their October lows.
The global economic crisis has led to a sharp decrease in the price of many key food commodities. But the pound has this year fallen strongly against the dollar and the euro - by 25% and 17% - amid concerns about high Government borrowing and deep cuts to interest rates. Analysts warn it could fall further if the UK cuts interest rates by more than other central banks.
This fall in the pound not only increases the costs of imported food - about half of all food in the UK. It also increases the price of key agricultural commodities, priced in dollars.
Investec analyst Martin Deboo said the first six months of 2009 looked tough for food suppliers. Deboo forecasts that world commodities will be 30% cheaper in 2009 than 2008, but due to the fall in sterling, the UK would only see half of this benefit.
"While the retailers are getting aggressive, many food companies have bought stock ahead for several months, which means it will be months until they see any falls in cost prices. It looks as if several companies will still be incurring inflation in early 2009."
Deboo also said suppliers could be hit as
"Just as we've started to see the base price of some of our ingredients come down, we've had this major currency hit," said one brand supplier. "We've struggled to pass on cost rises in the past 18 months and have taken major hits to margin as a result. Now we look like we've little prospect of seeing our own costs fall back. We need to pass on some cost or we're in trouble. The pound is likely to fall further, which could see our operating margins totally eroded."
Another supplier added "Retailers are seeing big falls in the spot prices on the global commodity markets. Our real costs are nothing like that - the currency impact is huge, and we've also got contracts bought ahead, and energy costs aren't falling. There's just no scope for cuts."
"The picture at the moment is really an inflation pressure cooker," added English Farming and Food Partnerships CEO Siôn Roberts. "Nor-mally the falling pound would drive food prices up very quickly. But we're facing what looks like a very deep recession, and that acts like the weight in the pressure cooker. Firstly, it contributes to the drop in world commodity prices, but also makes it impossible to pass on higher costs - you can't impose price rises on people who can't afford them. But as soon as the recession looks like it's ending, the weight comes off and inflation is set to explode."
Prices rocket up...
Coffee is up 23.9% year-on-year, despite many varieties being cheaper in dollar terms
Bananas are 25.2% more expensive than last year, and went up 8% in the last week
Orange juice is still 8.9% cheaper than last year, but has shot up in price 15% since October
Other commodities remain significantly more expensive, with sterling pushing prices up further. These include chicken (up 18.4%), beef (30.5%), rice (42.1%) and cocoa (47.7%)
As a result, food suppliers, especially those who import a major amount of raw material, face being squeezed during 2009 by higher costs. And with no prospect of increasing retail prices during recession, this has led some to warn retailers that if they want to avoid retail price hikes, they will have to take a margin hit, too.Coffee is up 23.9% year-on-year, despite many varieties being cheaper in dollar terms
Bananas are 25.2% more expensive than last year, and went up 8% in the last week
Orange juice is still 8.9% cheaper than last year, but has shot up in price 15% since October
Other commodities remain significantly more expensive, with sterling pushing prices up further. These include chicken (up 18.4%), beef (30.5%), rice (42.1%) and cocoa (47.7%)
The global economic crisis has led to a sharp decrease in the price of many key food commodities. But the pound has this year fallen strongly against the dollar and the euro - by 25% and 17% - amid concerns about high Government borrowing and deep cuts to interest rates. Analysts warn it could fall further if the UK cuts interest rates by more than other central banks.
This fall in the pound not only increases the costs of imported food - about half of all food in the UK. It also increases the price of key agricultural commodities, priced in dollars.
Investec analyst Martin Deboo said the first six months of 2009 looked tough for food suppliers. Deboo forecasts that world commodities will be 30% cheaper in 2009 than 2008, but due to the fall in sterling, the UK would only see half of this benefit.
"While the retailers are getting aggressive, many food companies have bought stock ahead for several months, which means it will be months until they see any falls in cost prices. It looks as if several companies will still be incurring inflation in early 2009."
Deboo also said suppliers could be hit as
...while retail prices remain flat
The November Grocer Price Index figures, which track retail price inflation, show another small month-on-month fall in prices of 0.1%. This was largely driven by seasonal promotions on confectionery and alcohol, which offset increases in the price of dry groceries and fruit and vegetables, which rose 5.9%.
Year-on-year inflation rose slightly, from 13.9% in October to 14.1% in November.
their insurance against a falling pound expires early in 2009, leaving companies facing a steep increase in costs.The November Grocer Price Index figures, which track retail price inflation, show another small month-on-month fall in prices of 0.1%. This was largely driven by seasonal promotions on confectionery and alcohol, which offset increases in the price of dry groceries and fruit and vegetables, which rose 5.9%.
Year-on-year inflation rose slightly, from 13.9% in October to 14.1% in November.
"Just as we've started to see the base price of some of our ingredients come down, we've had this major currency hit," said one brand supplier. "We've struggled to pass on cost rises in the past 18 months and have taken major hits to margin as a result. Now we look like we've little prospect of seeing our own costs fall back. We need to pass on some cost or we're in trouble. The pound is likely to fall further, which could see our operating margins totally eroded."
Another supplier added "Retailers are seeing big falls in the spot prices on the global commodity markets. Our real costs are nothing like that - the currency impact is huge, and we've also got contracts bought ahead, and energy costs aren't falling. There's just no scope for cuts."
"The picture at the moment is really an inflation pressure cooker," added English Farming and Food Partnerships CEO Siôn Roberts. "Nor-mally the falling pound would drive food prices up very quickly. But we're facing what looks like a very deep recession, and that acts like the weight in the pressure cooker. Firstly, it contributes to the drop in world commodity prices, but also makes it impossible to pass on higher costs - you can't impose price rises on people who can't afford them. But as soon as the recession looks like it's ending, the weight comes off and inflation is set to explode."
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