Global food prices are at a record high again, only two years or so after the last dramatic price spike sparked food riots and heightened the debate worldwide over food security. While there is alarm, analysts appear less worried about the current situation than they were in 2008. Food manufacturers, however, may beg to differ. Ben Cooper reports.
The spectre of sky-high food prices is back with a vengeance with serious implications for consumers, for governments attempting to shepherd economies through a fragile recovery period and not least for food manufacturers.
With the shock of the financial crisis, the worrying spike in food prices in 2008 may have faded from the memory somewhat but recent months have brought it back to mind all too clearly. The recent adverse weather in Australia and Brazil and the downgrading of crop forecasts in the US has heightened anxiety further.
In fact, according to the UN’s Food and Agricultural Organization (FAO) the current spike has taken global food prices higher than the 2008 surge. The UN’s Food Price Index, which tracks monthly price fluctuations across the dairy, meat, sugar, cereals and oilseed markets, averaged 214.7 points in December, against 206 points in November and 213.5 points at its previous record high in June 2008.
The chief catalyst behind the rise has been sugar, cereal and oil price increases, with high sugar prices particularly influential. The 2008 spike resulted in considerably greater focus being paid to the issue of food security and arguably having a further price surge in such a short timeframe will only heighten those concerns further.
However, the FAO suggested that the current situation does not represent a crisis, citing the fact that the price of rice, the staple of 3bn people in Asia and Africa, remains well below its record high, and the situation has not sparked the widespread food riots in developing countries seen in 2008.
In an interview with the Financial Times, FAO senior economist Abdolreza Abbassian stressed that from a global food security perspective rice and wheat are the critical commodities and not sugar, oilseeds or meat, though he added that it would be “foolish” to assume prices had reached their peak.
Other analysts have also played down the current situation. Analysts at Credit Suisse pointed out that the situation in 2007/2008 had been exacerbated by governments in countries such as India and Vietnam imposing export restrictions on rice. “The estimated global and exporting countries’ stock-to-use ratios of both wheat and rice are considerably higher today than in 2007-08, making shortages and drastic export bans unlikely, in our view,” Credit Suisse said.
Andrew Kuyk, director of sustainability at the UK’s Food and Drink Federation (FDF), believes it is too early to judge whether the situation is on a par with the 2008 crisis. “One doesn’t want to jump to conclusions at this stage but that equally applies to jumping to conclusions that everything is going to be all right,” Kuyk told just-food.
For the FDF and its counterpart organisations in other countries, the worry is that the current surge in prices will see food manufacturers squeezed as retailers hold fast in price negotiations.
One salient difference from the 2008 crisis is that today’s record prices follow two years of unprecedented economic turmoil and consumer demand remains weak. The economic situation not only heightens the worry of inflationary pressures for governments but sluggish consumer demand and low levels of disposable income will make retailers all the more reluctant to concede on price.
Only yesterday (13 January), UK retailer The Co-operative Group posted a drop in fourth-quarter sales, citing the “tough trading environment”. While Marks and Spencer chief executive Marc Bolland struck a conciliatory tone earlier this week, stating that the retailer would “work together” with its suppliers to manage commodity prices and that it sought long-term partnerships with suppliers, in truth such rhetoric can be taken either way. A retailer offering a supplier a long-term commitment is arguably more likely to ask that supplier to absorb short-term fluctuations in raw material costs.
Kuyk couched his words diplomatically when assessing the price negotiation issue. “Clearly there are cost pressures building on manufacturers both through the raw material and fuel and other input costs,” he said. “There are going to be tensions between those cost pressures and demand that is dampened by a range of factors and may remain relatively depressed.”
However, he added: Clearly there will come a point where manufacturers can’t go on absorbing cost increases indefinitely without seeking to pass them on, and there will have to be judgments made by manufacturers and retailers as to what the market will bear in those circumstances.”
Sainsbury’s chief executive Justin King appeared to represent the rather more hard-nosed approach that manufacturers fear from their retail clients.
King told just-food that many of the commodity cost increases, particularly on wheat, had been “widely predicted” and that suppliers should have prepared by hedging against them. King said Sainsbury’s had forward contracted to “what we believe to be a fair price” for wheat for its own-label bread requirements.
Kuyk conceded that many manufacturers would have hedged against this increase, but pointed out that hedging itself involves a cost to the supplier and that some of these positions are now expiring leaving manufacturers more exposed. “Simply saying that hedging is there so therefore there isn’t a problem is very simplistic,” Kuyk added.
The matter of hedging raises another major concern arising from the current price spike, that of the involvement of hedge funds in commodity markets and the role that speculation has had in exacerbating the situation. On Monday, Jorgen Buhl Rasmussen, CEO of Danish brewer Carlsberg, berated hedge funds involved in short-selling, stating that authorities should consider regulation. French president Nicolas Sarkozy raised the matter with Barack Obama this week in Washington in his capacity as leader of the G20.
Some commentators have suggested that unscrupulous financial speculators are now wreaking the same havoc in food markets that they brought to financial markets with the sub-prime mortgage debacle.
The difficulty for the food industry is that forward buying is such an integral part of the business. As Kuyk points out, in huge global commodity markets, differentiating forward buying by customers as part of a legitimate commercial strategy from those made for purely commercial reasons would be no easy task.