Commodity prices may ease in the mid-term but the rising cost of food production is here to stay, a report from Deloitte Touche Tohmatsu has claimed.
“While food commodity prices may come down from their current peaks, the rises already seen in the real cost of food represent a permanent step change,” Deloitte’s report, Food and Beverage 2012 – a taste of things to come, said.
“With consumers also being impacted by higher energy costs, economic uncertainty and a reduction in the availability of cheap credit, the effect could be significant,” the report said.
The price of commodities has dramatically increased in recent years. Since 2005, the cost of maize and rice has doubled. Meanwhile, in the past three years the price of wheat has trebled: in 2007 alone, wheat prices soured 52%.
This, the research group said, is resulting in a marked change in consumer behaviour.
“We are already seeing signs of higher food prices leading to a shift in purchasing patterns towards lower-priced private-label and discount products and shopping at low-priced retailers,” Dr Ira Kalish, Deloitte Research’s consumer business director, said.
According to the report, this has presented retailers with a dilemma: how to absorb increased costs in order to preserve revenue without seriously denting profitability?
However, the outlook for retailers is not entirely bleak, Deloitte said. The research group emphasised the opportunities presented by the downturn.
“Consumers switching from eating out to shopping for food for home should protect growth. Price inflation also presents retailers with an opportunity to protect and enhance margins as consumers become more accepting of price rises,” Lawrence Hutter, global consumer business lead at Deloitte, observed.
Deloitte predicted that global commodity prices are likely to stabilise, provided market forces are allowed to run their course.
“If market forces are permitted to function, food production will expand, land efficiency will increase, and prices will ultimately come back down,” Kalish predicted.
However, Kalish also carried a warning: “Agriculture is one of the last bastions of intense government involvement in the market.
“Therefore, retailers and suppliers must prepare for various scenarios, including the worst with continued rises in commodity prices and slowing consumer spending. They must exhibit flexibility, minimise costs, maintain multiple supply chain choices and clearly differentiate from competitors.”