Rising food prices and farm incomes

This post was written by Alan Matthews

Aideen Sheehan has a piece on food prices in today’s Irish Independent reporting that prices of some popular branded foods have risen by 7% over the past 8 months compared to prices in a survey conducted by the National Consumer Agency last summer. However, the real story in recent months has been the remarkable stability in food prices despite soaring commodity prices on world markets.

It is plausible that we will face higher food prices in coming months, but the official figures for food price inflation compiled by the CSO show no rise in food prices over the past 12 months – the index (base Dec 2006 = 100) was 101.2 in January 2010 and 101.1 in January 2011.This followed a fall of -8.1% in the index in 2009.

The stability in the index during 2010 is rather remarkable given the sharp rise in food commodity prices over this period. Partly it is explained by the fact that consumer retail prices for food are more influenced by movements in non-food costs given the relatively low share of food raw material costs in what consumers spend on food at retail, but it may also indicate that, at last, we are seeing some real competition in the Irish grocery market over this period.

As Joe Gill of Bloxham stockbrokers notes in the Independent article, rising food prices are a double edged sword, potentially benefiting food companies and farmers while penalising consumers. However, part of the reason for rising food prices is rising energy and other costs, so whether farmers and food companies benefit from rising food prices depends on their exposure to these costs.

I present below two graphs showing movements in farmers’ output and input prices using data from the CSO’s excellent Statbank. The long period graph shows how farm input costs have risen faster than output prices over the period 1995-2010. The output price index has been influenced by trade liberalisation and, more importantly, CAP reform over this period. Farmers were compensated for the reduction in output prices due to CAP reform by increased direct payments.

The second graph shows price trends in the more recent period since the start of the first food price spike in 2007-08. Apart from a small upward movement in agriculture’s terms of trade (the ratio of output to input prices) in the last half of 2007, the terms of trade deteriorated for all of 2008 and much of 2009. Output prices started to recover in the last quarter of 2009 and, by end 2010, farmers’ terms of trade had just returned to where they were at the outset of the recent period of food price volatility. More recently, input prices have again started to accelerate putting the agricultural terms of trade under pressure.

While a 1 per cent change in output prices has a larger impact on farm incomes than a 1 per cent change in input prices, we should be careful in assuming too readily that higher food commodity prices necessarily translate into a bonanza on the farm.

21 Responses to “Rising food prices and farm incomes”

  1. JohnTheOptimist Says:

    There has been a very marked divergence in recent years in food price inflation on the two sides of the border. South of the border, the evil and rapcious right-wing FF-led government allowed average food prices to soar by a staggering 2% in total between 2005 and January 2011, in the process causing mass starvation of the masses, and drawing the wrath of commentators like Fintan O’Toole and Vincent Browne for their callous treatment of the poor. In contrast, the caring socialist government in the UK (for most of that time) kept average food price rises north of the border to a relatively modest 35% between 2005 and January 2011. Now that we are getting a government that cares about the poor, let’s see if they will change this appalling situation.

  2. Brian Woods Says:

    Regretfully I have to say, “I saw this coming”.

    “. . . real competition in the Irish grocery market” - Now this would not be margin compression would it? If so, that’s nasty for future income. Lets see what emerges.

    “. . . part of the reason for rising food prices is rising energy and other costs, so whether farmers and food companies benefit from rising food prices depends on their exposure to these costs.”

    Modern farming practices in Ireland (with some few exceptions) are totally dependent on diesel (without exise duties!) and animal food and crop fertilizer produced using oil or nat gas. Farm prices will be squeezed between increases in input costs and consumer resistance to increased food prices. Ugly outcome. Expect some bleating (of the human kind) shortly. “Please minister may we have some more - subsidies!” Modern food production has an Achilles’ Heel - its transport costs.

    Separate the necessaries from the discretionaries. The latter will drop out first. However the major food producers are now ‘downsizing’ portions, which cost same as priors. Interesting. Consumers are slow to engage in ’switching’ so the nett effect takes a while to be noticed.

    I expect (more in hope!) that oil prices will fall back somewhat, but I expect them to start back up again next year. Then they will drop temporarily before rising again. This up-and-down will go on for a few years, but the ups will be a little higher, and the downs a little lower. It will be 2015 (probably) before we know for sure whether global oil supply has dipped below global demand. When that occurs, and it will, “watch out below!”.

    BpW

  3. Eamonn Moran Says:

    Hi Alan

    Have you compared price stability in Irish Grocery market V the UK Grocery market?

    Wouldn’t that allow you to establish causality for your hypothisis that it is down to increased competition?

    It has been my impression that the main reasons would be 1.
    as you have already mentioned “Partly it is explained by the fact that consumer retail prices for food are more influenced by movements in non-food costs given the relatively low share of food raw material costs in what consumers spend on food at retail”
    However couldn’t one determine the size of this part by just measuring price increases for raw materials sold at retail? eg the price increase of a basket containing non branded fruit rice suger etc?

    2. European Food market is hugely interfered with by various economic and political interests because we have the power to control the market. Where as this is not the case for smaller markets.

  4. Eamonn Moran Says:

    John are you trying to credit ff with food price stability in Ireland between 2005-2011?

  5. The Alchemist Says:

    It is curious, given diminished consumer spending power, that offal is still relatively scarce in supermarkets. Some lambs liver and occasionally lamb kidneys but beef offal is rare. Most processors export beef offal, and if you ask your local butcher for an ox kidney, ox tongue or an oxtail he’s unlikely to have it in stock (ok, there are traditional street and ethnic ares were this can be challenged). In the longer run for pork and chicken and winter beef, the real concern may be less transport and more the cost of soya. It is a crucial source of lysine, now that animals are no longer fed MBM (meat and bone meal).

  6. JohnTheOptimist Says:

    @Eamonn Moran

    John are you trying to credit ff with food price stability in Ireland between 2005-2011?

    JTO again:

    Well, its like this.

    Most things are out of control of the government and not directly due to government action. This is true whether it is good things or bad things.

    However, since 1997, the FF government has been demonised by the media, and by posters on sites such as this, for virtually everything that occurred that was not to their liking.

    Had food price inflation, between 2005 and January 2011, been 2% in the UK and 35% in Ireland, I have no doubt that the FF government would have been crucified by the media and portrayed as crooks for letting their ’supermarket-owning friends’ push up food prices so much. I am merely pointing out that it is the reverse that has happened. Food prices have been virtually flat in Ireland since 2005, while rising by one-third in the U. Kingdom. Everyone can have their own explanation as to why that was so.

  7. Alan Matthews Says:

    @Eamonn, Brian

    My intention in the post was to highlight the relationship between food price increases, on the one hand, and input cost increases, on the other, rather than discuss the trend in food prices per se.

    But both of you are right that a full analysis of trends in retail food prices should start with a breakdown of margin movements for the various actors in the food chain. We should recognise that this is not an easy task.

    The EU has been moving to increase price transparency in the food chain. One result is the Eurostat Food Prices Monitoring Tool which allows comparisons of avaiable price data at various stages of the food chain for each Member State, allowing comparisons of the kind suggested above between Ireland and the UK, for example. Those interested will find the data at http://epp.eurostat.ec.europa.eu/portal/page/portal/hicp/methodology/prices_data_for_market_monitoring. There is a paper describing the tool, which is still experimental, which can be downloaded from this page.

  8. seafóid Says:

    According to Lex food prices in the West are only party driven by commodity prices.

    http://www.ft.com/cms/s/3/fcc929b2-465d-11e0-aebf-00144feab49a.html#ixzz1G6cao3Gy

    “. in these (rich) countries agricultural commodity prices account for only 20 to 25 per cent of the price of food anyway (most of the rest reflecting domestic labour costs)”.

    how much would the supermarkets take from the price paid by the consumer in Ireland ?

  9. Alan Matthews Says:

    In posting my previous comment, I forgot to mention that DG AGRI in the Commission now publishes a monthly commentary on food price developments based on the data in the Eurostat Food Prices Monitoring Tool. You can find the archive at http://ec.europa.eu/agriculture/analysis/markets/foodprices/index_en.htm.

  10. Michael Hennigan - Finfacts Says:

    Global food prices rose for eighth straight month in February; Real food cost at lowest since Great Depression

    http://www.finfacts.ie/irishfinancenews/article_1021781.shtml

    Changing diet patterns in emerging markets coupled with he fact that global productivity growth –  as measured by the amount of crop produced per hectare - - has fallen for rice and wheat compared with the 1980s and 1990s and has been broadly stagnant for corn and soybeans, suggests that food prices will remain elevated for an extended period.

  11. Paul Hunt Says:

    @Michael H,

    Given your superb ability at assembling useful data and information, have you come across any evidence of speculation driving these price increases? After the surge in crude oil prices in the summer of ‘08 there was a lot of noise about the impact of speculators and index funds. Initially it was pooh-poohed, because it was believed that speculators would have to be stock-piling oil to move prices. Subsequently, however, it emerged that interactions between derivative prices, indices and spot prices were pushing up spot prices.

    Btw, Michael Taft, over on progressive-economy.ie is worried that your worries about Irish tax levels reaching Danish levels are unfounded.

  12. seafóid Says:

    Does anyone have any stats on the increase in meat eating in China that is supposed to be one of the main drivers of the increase in grain and soya prices over the last year ? I have read on several occasions that India is going through the same process but most Indians are vegetarian.

  13. Alan Matthews Says:

    @ seafoid

    The share that supermarkets take from the retail food price is not known definitively. Tesco’s margins in Ireland are reputed to amongst their highest worldwide, perhaps up to 9%, but this would cover margins on both food and non-food items in their stores (generally, margins are higher on non-food).

    In general, it is easier to derive supermarket margins for staple foods. UCC did a study some years ago for the Consumer Liaison Panel (see http://www.agriculture.gov.ie/foodsafetyconsumerissues/consumerliaisonpanel/) and found that the supermarkets’ share of the retail price for cheese and butter combined had increased sharply in 2004 to around 60%.

    But because there is limited data on wholesale prices it is virtually impossible to determine the processor-retailer margin in Ireland. For staple foods, there is some information on the farmer-retailer spread (the inverse of the farmers’ share of the retail euro). The latter varies between 20 and 50% depending on the product, according to data prepared by the IFA (http://www.ifa.ie/portals/11/policy/Food%20Supply%20Chain%20Proof%28Final%2023%20Feb%202010%29.pdf)

  14. Brian Woods Says:

    @ AM: Thanks for correction. Trying to get any accurate data on input costs seems to be fearfully difficult - there are so many differing and confounding aspects.

    Some time back I seem to recall a piece on theOilDrum that examined the different types of energy inputs for food production.

    BpW

  15. The Alchemist Says:

    @Alan Matthews

    Supermarkets have been stepping on their suppliers for years. Those attractive special offers - 20%, 30%, 50% off etc. The discount is carried by the supplier in cases with which I have direct familiarity. One of the continuing miracles of agri business at the moment is that Irish chicken producers are still in business.

  16. seafóid Says:

    @ Alan Matthews

    Thanks

  17. Alan Matthews Says:

    @ Alchemist

    If those price reductions are passed on to consumers, then there is no ground for complaint, that is competition at work and it can be a hard taskmaster. I know the well-voiced suspicions that competition is less than it might be in retail grocery, but it is hard to find evidence of this, and recent developments suggest competition may have increased. I also dislike the idea of retrospective changes to contracts which seems to me to be an abuse of market power.

  18. Michael Hennigan - Finfacts Says:

    @ Paul Hunt

    There were a number of studies in 2008 on speculation but the view appears to be that the prices were mainly responding to fundamentals. Specualtion was ceratinly an issue in short-term movements.

    I haven’t time to look at Michael’s comment; the DoF presents the data in an arcane manner; local government spending/receipts are not broken down as PRSI is treated as if it’s an insurance fund when it essentially similar to income tax.

  19. Mickey Hickey Says:

    The price of crop growing land around the world is rising at an accelerating rate. The bubble is now growing, speculators are active. In Ireland the crop was housing sites and even though the market collapsed it will take a long time for food prices to provide lift.

  20. Michael Hennigan - Finfacts Says:

    As regards Tesco, our traditional surplus on food and drink exports with the UK is fast eroding and it is the mainstay of the indigenous manufacturing sector.

    The UK overall has been doing well in f&d exports in recent years - - maybe helped by sterling.

    @ Paul Hunt

    Paul,

    In a follow-up to Michael Taft, I discuss the issue of GDP v GNP here:

    http://www.finfacts-blog.com/2011/03/ireland-gdp-or-gnp-which-is-better.html

  21. Brian Woods Says:

    @MH: “The price of crop growing land around the world is rising”

    So I notice. Now getting that crop off the land needs what? Oh, I was afraid of that (fuel and fertilizer from fossilized carbon sources). Also crop-land can become ‘tired’ and has to be fallowed. Latter may take 20 years if the land had been overused. Soil depletion is an entirely different matter: Irreversible. UK is crop-land constrained, so far we are not. But that could change very fast if inappropriate agri policies are pursued. Prognosis is not good.

    BpW

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