From supermarket big cheeses to newspaper columnists, there's rarely a shortage of pundits queuing up to estimate food price inflation. Yet, despite two years of fevered scrutiny of food costs, putting figures on future price levels has always been a black art. Until now.
English Farming and Food Partnerships (EFFP), a not-for-profit agrifood consultancy, has developed a model using CPI forecasts, cereal pricing, exchange rates, oil prices and even estimates of food companies' margins. Working with the Cranfield School of Management, this week it published predictions of food price inflation for the next two years.
If the predictions prove accurate, the quarterly report will make essential reading. But as the UK economy stands on the brink of recession, with the exchange rate plummeting and food prices inflating in a way not seen for over a decade, can the model stand up in practice?
The predictions are somewhat counter-intuitive: despite the fact that commodity and fuel prices are now falling sharply, the market will still see food price inflation, though it will slow to 3% by mid-2009, down from 12% currently, as the fall in the pound continues to provide inflationary pressure on commodity buying. And prices will not return to their pre-2006 levels, says EFFP chief executive Siôn Roberts, as last year's rocketing prices marked a permanent shift in the market. He also warns that the industry must brace itself for long-term volatility in commodity prices, due to closer correlation between supply and demand.
So how accurate are the EFFP's predictions? It's obviously too early to say. But according to Séan Rickard of the Cranfield School of Management: "Our model would have predicted the food price spikes of the past two years. It would even have predicted cereal prices over that time."
So how far ahead can it look? "One of the key limitations," says Rickard, "is that it can't use cereal price information beyond the next harvest, after which the estimate is based solely on other factors."
But the model is robust enough to cope with the food industry's notorious price fluctuations, he says. "This may be a volatile sector, but what happens to retail prices today is largely affected by what happened a few months ago. We're not foolish enough to predict with certainty events 12 months distant, but over a three to six-month period we're confident."
The biggest risk factor in the medium term is the impending UK recession, says Rickard. "If it's particularly bad, then we could be looking at a fire sale, where everybody cuts back spending anywhere they can. If that happens, then inflation could well end up negative. That scenario would be right at the bottom end of our probability fan."
The EFFP is perfectly placed to offer believable food price inflation figures, says Roberts. "The problem for most people in the industry is that when they say what they expect food prices to do, they have a clear commercial agenda. If someone from a supermarket says prices will fall, it's a case of 'well, you would say that, wouldn't you?' It's the same for farmers. We're independent, we're advisory, we're not political and ultimately we've got no commercial interest in prices ."
The EFFP plan, says Roberts, is to publish the figures as the basis of a long-term strategic debate on how the industry works. In future this may include category-based predictions such as bakery, meat and dairy, but the model requires further testing and possibly tweaking before such a rollout might occur. The ultimate objective is to encourage greater collaboration.
"It's about trying to stop the short-termist let's-try-to-screw-down-prices attitude. We're not publishing individual category figures, which may be used in negotiations. If people want to criticise us for this, I'm happy to stand up to that. This is a credible view on inflation to inform a proper discussion on strategy."n
English Farming and Food Partnerships (EFFP), a not-for-profit agrifood consultancy, has developed a model using CPI forecasts, cereal pricing, exchange rates, oil prices and even estimates of food companies' margins. Working with the Cranfield School of Management, this week it published predictions of food price inflation for the next two years.
If the predictions prove accurate, the quarterly report will make essential reading. But as the UK economy stands on the brink of recession, with the exchange rate plummeting and food prices inflating in a way not seen for over a decade, can the model stand up in practice?
The predictions are somewhat counter-intuitive: despite the fact that commodity and fuel prices are now falling sharply, the market will still see food price inflation, though it will slow to 3% by mid-2009, down from 12% currently, as the fall in the pound continues to provide inflationary pressure on commodity buying. And prices will not return to their pre-2006 levels, says EFFP chief executive Siôn Roberts, as last year's rocketing prices marked a permanent shift in the market. He also warns that the industry must brace itself for long-term volatility in commodity prices, due to closer correlation between supply and demand.
So how accurate are the EFFP's predictions? It's obviously too early to say. But according to Séan Rickard of the Cranfield School of Management: "Our model would have predicted the food price spikes of the past two years. It would even have predicted cereal prices over that time."
So how far ahead can it look? "One of the key limitations," says Rickard, "is that it can't use cereal price information beyond the next harvest, after which the estimate is based solely on other factors."
But the model is robust enough to cope with the food industry's notorious price fluctuations, he says. "This may be a volatile sector, but what happens to retail prices today is largely affected by what happened a few months ago. We're not foolish enough to predict with certainty events 12 months distant, but over a three to six-month period we're confident."
The biggest risk factor in the medium term is the impending UK recession, says Rickard. "If it's particularly bad, then we could be looking at a fire sale, where everybody cuts back spending anywhere they can. If that happens, then inflation could well end up negative. That scenario would be right at the bottom end of our probability fan."
The EFFP is perfectly placed to offer believable food price inflation figures, says Roberts. "The problem for most people in the industry is that when they say what they expect food prices to do, they have a clear commercial agenda. If someone from a supermarket says prices will fall, it's a case of 'well, you would say that, wouldn't you?' It's the same for farmers. We're independent, we're advisory, we're not political and ultimately we've got no commercial interest in prices ."
The EFFP plan, says Roberts, is to publish the figures as the basis of a long-term strategic debate on how the industry works. In future this may include category-based predictions such as bakery, meat and dairy, but the model requires further testing and possibly tweaking before such a rollout might occur. The ultimate objective is to encourage greater collaboration.
"It's about trying to stop the short-termist let's-try-to-screw-down-prices attitude. We're not publishing individual category figures, which may be used in negotiations. If people want to criticise us for this, I'm happy to stand up to that. This is a credible view on inflation to inform a proper discussion on strategy."n
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