Saturday, March 12, 2011

Warning Bells Toll For Consumers Over Food Prices

Consumers might have to fork out extra cash for their staples after global food prices last week hit their highest point in 20 years, increasing for the eighth consecutive month in February, with prices of all commodity groups monitored, except for sugar, rising again.

"Unexpected oil price spikes could further exacerbate an already precarious situation in food markets," said David Hallam, the director of the trade and market division of the United Nations' Food and Agriculture Organisation (FAO).

With the International Monetary Fund (IMF) already warning that higher food prices may be here to stay, the news has heightened concern that a food crisis similar to the one experienced in 2007-08 could be looming.

"Around the world, poor weather has reduced harvests and driven up food prices, fuelling inflation risks and hitting the most vulnerable," said adviser Thomas Helbling and economist Shaun Roache from the IMF's research department.

Finance Minister Pravin Gordhan said that, globally, there was a shared concern about food and oil price inflation, but that the challenges surrounding food prices were far more structural than those regarding oil prices.

"There's an understanding that we're not getting the global production and distribution systems right. There are changing structural factors that have been written about quite a lot, like the large number of people entering the middle classes and too much red meat being eaten... feeding habits are changing around the world and all these factors haven't been built into the production system."

The finance minister was speaking earlier this week at an I-Net Bridge/BusinessLIVE breakfast, joined by George Glynos, a strategist at Econometrix, and Isaac Matshego, an economist at Nedbank.

Though rising food and oil prices were starting to add upward pressure to inflation, both locally and globally, the effect on SA had up till now been fairly muted, thanks to the "strongish" local currency, according to Gordhan.

Upmarket retailer Woolworths said that it had benefited from the rand exchange rate. "But for how much longer can that soften the blow?" asked CE Ian Moir at the group's results presentation last month.
Moir added that there was no doubt that rising commodity prices and other factors were driving inflation both in food and clothing. "We are going to see more inflation in foods. Wheat prices continue to rise - they are not quite up to the levels we had in 2008, but they are getting there," said Moir.

"You'll see the impact of fuel and wheat prices eventually affecting meat and other products, so we're going to see a differential effect. The cost of fuel will drive increases in many of our grocery lines that are dependent upon that. I think food inflation will see 8% plus. In clothing we will see roughly the same, it is going to be more of an inflationary environment than we've experienced for some time," he added.
Similarly, Spur Corporation, the owner of Panarotti's and John Dory's, said that increasing fuel, utility and food prices and the anticipated increase in inflation remained a challenge.

In the US, consumers are already bracing for grocery price hikes after companies like Kraft Foods, Kellog Company and McDonald's announced plans to pass on added costs of items like beef, milk and coffee to customers.

Meanwhile it was revealed this week that food prices in the UK are rising at three times the rate of the world's seven biggest economies.

The Shoprite Group told BusinessLIVE that its internal food inflation for the eight months to February was -1.3%. "We are still experiencing food deflation. The group is not aware of material price increases in the near future," they said.

The SA Reserve Bank expects inflation to remain within the 3%-6% target band in 2011, though climbing food and oil prices remain a shadowy concern.

"We have to plan as a globe in some kind of way that this doesn't become 2008 or any other previous crisis we've had in terms of food supply and its impact on poor people in particular," Gordhan warned ominously.
The United Nations is set to run a series of seminars to help governments make informed decisions on how to respond to high food prices and to exchange experiences from the most recent food price crisis in 2007-08.

"The FAO feels it is essential that countries consider their policy options and steer away from decisions that might exacerbate the situation. During the last food crisis, the situation was aggravated when some countries imposed export restrictions or engaged in panic buying," said FAO deputy director-general Changchui He.