Pressure on food prices grows

    TOPimage_96296LEAD

    Global food prices have increased for more than half a year and the pressure on food prices in Cayman is increasing, the latest consumer price index data from the Cayman Islands Economics and Statistics Office shows.

    Since the UN Food and Agriculture Organisation reported in January 2011 that its FAO Food Price Index had reached a record high since its inception in 1990, high global food prices have been mentioned in connection with civil unrest in Northern Africa and the Middle East as well as concerns over inflation in the rest of the world.

    The FAO Food Price Index, which combines five individual food commodity price indices for cereal, oils and fats, dairy, sugar and meat, increased for the seventh consecutive month, by 3.4 per cent alone from December 2010.

    All commodity groups experienced price hikes in January except for meat, which saw steady prices.

    In Cayman food prices increased by 3.4 per cent year on year in December 2010, outpacing overall inflation which stood at 0.3 per cent for the year.

    Vegetables (11.6 per cent), meat (5.3 per cent) and dairy products (4.6 per cent) were the biggest price drivers among the food products in 2010.

    Meanwhile bread and cereals (-3.9 per cent), fish and seafood (-2.1 per cent) and coffee, tea and cocoa (-2.5 per cent) actually decreased in price.

    The same applies to global food prices where in January cost increases within each food group were not uniform, as for example the cost of wheat and maize rose by 4 per cent, whereas rice was 4 per cent cheaper.

    In general however global food prices have grown by over 20 per cent since the summer of 2010.

    TOPmage_96242

    Why are food prices so high?

    After the food crisis of 2008, good harvests for most basic foods helped prices to fall from peak levels and in early 2010 the FAO had not expected food prices to increase substantially.

    But severe weather took the markets by surprise. Instead of the predicted record crops in some of the largest food producing countries, 2010 was a bad year for agriculture globally.

    Adverse weather conditions ranged from the worst draughts in the history of Russia and the Ukraine, too much rain in Northern Europe and Canada and a very hot summer in the US Midwest.

    The resulting lower overall production in the face of rising demand meant prices had to rise.

    “Right now because many crops have been damaged by the freeze in Florida and Mexico, there is a shortage of these crops,” noted Leonie Ebanks from Hurley’s Group.

    In addition, “flooding has also had an effect on staples like rice, wheat, corn, we can look for high prices on these also”, she said.

    Additionally, the rise in popularity of biofuels means that in some regions of the world there is a competition for land between food crops and ethanol plantations, which further hurts the balance between supply and demand for certain food groups.

    Some countries, like Russia, reacted to low production in 2010 with export restrictions or closed their market off entirely, which prompted panic buys by some Northern African countries that are strongly reliant on basic food imports.

    The market for sugar, which has seen the highest prices in 30 years, is largely at the mercy of the two largest sugar producers Brazil and India.

    India’s imminent decision whether to export sugar is going to be critical for the price of sugar.

    As long as the sugar supply from India to the rest of the world remains limited, given the rising the demand for sugar in the developing world, prices will stay high.

    In addition the FAO said speculators have exacerbated the situation, although they are not the cause of problem.

    Oil price also important

    Another important factor for food price growth is the rising oil price.

    Not only is modern agriculture strongly reliant on fossil fuels for machinery and fertiliser production, the cost of transportation plays a major part in the prices consumers will have to pay in their local supermarkets.

    “Oil continues to rise, and as long as this happens our prices will rise,” noted Mrs. Ebanks. “Transportation is key to our business, trucks to bring the goods to Florida, ships to bring supplies to Grand Cayman,” she explained.

    Moreover, oil is also needed to generate electricity, translating into higher costs for storage.

    “We know that in Grand Cayman, once oil rises in price, our cost increases with the next shipment into Grand Cayman.”

    Some government help on duties could help alleviate the problem somewhat.

    “With oil prices hitting $93 today, maybe our Government could keep the duty on oil to say, $80 per barrel prices. This would help keep prices down a little, but we still have to pay inland freight in the US and England, as well as bunker charges by the ships,” Mrs. Ebanks said.

    Only limited potential to absorb cost increases

    Food retailers are limited in the way they can offset costs increases in basic foods.

    Although there is potential to make a company’s internal processes and external supply chain more efficient, this has been the focus of retailers for some time already, said Roger Dreyer, senior manager for grocery, dairy and frozen at Foster’s Food Fair IGA.

    “The manufacturers and retailers have absorbed much of the increases in raw materials for the last year and have only passed on a fraction.”

    As a result profits for food retailers are down.

    “Most food suppliers, manufactures and retailers have been reluctant to pass on these increases and have focused on cutting costs but now the increases in efficiency are to a point where any further gains in productivity will be so small they can’t offset the higher cost of goods,” he said.

    Thom Guyton, managing director of Kirk Supermarket added that “the supermarket industry is a low margin business in any market and Cayman is no exception”.

    “Over the past two years, in an effort to hold prices to a minimum, we have absorbed the majority of increased port costs, work permit fees, fuel taxes (CUC bills), etc,” he explained.

    “To offset these increases, we have invested heavily in technology to increase our internal efficiencies and have taken aggressive steps to cut our own operating costs where possible.

    We will continue to improve our efficiencies and will strive to keep food prices at the lowest level possible, however there is going to be a point where increases in the first cost of our products will have to be passed on to the consumer,” Mr. Guyton said.

    Another factor is that Cayman’s small population and a comparatively low sales volume makes it difficult for supermarkets to absorb increases in food prices, said Mrs. Ebanks. “We have to pass them on to the consumer.”

    This however also works in the opposite direction and “on a positive note”, Mr. Guyton added, ”we also see and pass on a significant number of price reductions on a wide variety of products on a weekly basis”.

    A comparison of Cayman and global food prices confirms that food retailers in the Cayman Islands have so far absorbed much of the global food price increases and other costs.

    In the past, for example in 2008, some of the cost increases found their way into the Cayman market with some delay.

    Supermarket operators in Cayman agree that it is very difficult to forecast how much the cost of food will rise this year because too many variables from the weather to the oil price are involved, but asked to speculate Mr. Dreyer expects food prices to increase by 5 per cent or more in 2011.

    Some of these price increases may initially be hidden, he said, by shrinking package sizes. “The increases in cost do not take into account the hundreds of items where the package size this year is smaller than the same item last year by anywhere from 6 to 13 per cent.

    Changing the package sizes may hide the inflationary aspects but only temporarily as they can only cut the sizes so far,” he said.

    For 2011, the FAO says that there needs to be more production in most food commodity groups to meet the rising demand and this will depend mainly on good weather, specifically from January to April in South America, from March to May in Europe and later in the year in the US.

    TOPimage_96296STORY

    Hurley’s and other supermarkets on Grand Cayman are trying to keep food costs down.
    Photo: Jewel Levy

    2 COMMENTS

    1. Perhaps a naiive suggestion but if the Cayman supermarket interests could combine their purchasing power from their suppliers could they not benefit from economies of scale? It is recognised that this may not work in terms of perishable goods but non or relatively longer life items would seem to be a case in point.

    Comments are closed.