As Australia suffers one of its most severe droughts in decades, speculation has increased as to whether food retail prices will rise as a result. If they do, sectors such as bakery, dairy and chilled food could see a slowdown in value growth in 2003, reports Euromonitor International.

According to meteorologists, El Niño, widely responsible for ongoing adverse weather conditions in Australia, is only expected to fade by April 2003. However, this will not automatically promise an end to the drought that it has caused in the country, and its effects are likely to be felt for months to come.

The Australian Bureau of Agriculture and Resource Economics (ABARE) stated in October that as a result of the drought, the country’s winter as well as summer crops would be disappointing. As wheat crops have also been poor in the US and Canada – also due to drought conditions – the price for wheat has risen not only in Australia, but globally.

Possibility of higher retail prices as a result of rising raw material costs
Lower production of certain raw materials including wheat have resulted in food manufacturers facing rising costs, some of which could be passed on to the end consumer. Goodman Fielder, Australia’s number one bread manufacturer and second-largest packaged food company, has already announced that it would raise the price per loaf of bread by an average of 10%, no longer able to completely absorb rising costs. Moreover, the company stated that should the drought continue, it would need to review its prices once again early next year.

Likewise, as farmers pay more for stock feed, prices for dairy products, eggs and meat could also be subject to increase. Meat prices decreased temporarily, as farmers were forced to slaughter livestock due to the shortage of feed; however, in the medium term prices are also likely to rise.

The Australian Food and Grocery Council (AFGC) emphasises that suggestions of price increases are alarmist, as they do not take into account various other factors which determine product prices, such as costs of plant operating, labour and marketing. Moreover, food manufacturers would normally try to absorb increasing costs internally before passing them on to cost sensitive consumers.

Nevertheless, as the case of Goodman Fielder shows, if the situation persists over a longer period manufacturers will face increasing pressure to pass on the burden.

Sugar tax exacerbates manufacturers’ problem
Prices for all domestically produced products containing sugar could also be subject to increases, as a consequence of legislation which will come into force in 2003. The implementation of a ‘sugar tax’, in a bid to rescue the country’s ailing sugar industry will see prices increase by A$0.03 (US$0.02) per kg for the next five years.

The tax will apply to all sugar sold in the country, whether as a finished product to retailers or as a raw material to food and drink manufacturers. While it was expected that Australian manufacturers would attempt to absorb these costs internally in order to remain competitive with international firms, the ongoing drought increases the pressure to pass on at least some to consumers.

Value growth could be affected in case of price rises
Rising prices of staples such as bread and dairy products would mostly affect lower income families, leaving less money available for other products. Thus, they are likely to cut down on non-essential food (and non-food) products in order to afford the rising price of staples.

Households with higher disposable incomes could also begin changing their purchasing habits as a result of higher prices. Consumers across income groups are generally very price conscious with regards to staple foods such as bread, and are not willing to pay beyond what they deem an acceptable price for such products.

Thus, while Australian consumers have in recent years been increasingly drawn to premium varieties across food sectors including bakery products, they could opt for less premium alternatives should retail prices rise generally.

This in turn could result in a dip in demand for premium products, and paradoxically the price increase might lead to overall slower value growth. Bread, for instance, is likely to fall short of meeting value growth of 3.5% originally forecast by Euromonitor for 2003. Likewise, chilled processed meat may not achieve its expected value growth of 5%, and milk could even be less impressive than the 2% originally forecast for 2003.

Value growth of packaged food sectors depending on commodities affected by drought, such as bakery, dairy products, pasta, oils & fats and chilled food could all be negatively affected during 2003, depending on the duration of the drought and the possible implementation of price increases.

Despite this, retailers remain confident – total retail sales were up by 5% in October, and the Australian Retailers Association (ARA) has forecast growth of nearly 4% over Christmas. Australians are very price conscious, however, and retail price increases after the Christmas season will directly impact purchasing habits, albeit only as a temporary phenomenon.

Related Euromonitor Reports:
The Market for Packaged Food in Australia

The Global Market for Dairy Products

World Food Marketing Directory 2002/2003