Why are Food Prices So High?

Wyn Morgan

Sixth form Conference

27th June 2006

Outline

1. Do Food Prices Matter?

2. What is UK Food Inflation?

3. Why is Food Inflation So High?

4. Conclusions

Do Food Prices Matter?Some questions……

• How important is the food industry to the UK economy?

• What proportion of our income goes on food?

Impo

rts £

32bn

Exp

orts

£14

bn

Employment & Value in the UK Food & Drink Chain

Source: DEFRA

China, People’s Rep. of 33.20 Malaysia 30.00 Hong Kong, China 26.94 Philippines 46.58 India 57.00 Singapore 23.38 Indonesia 42.30 Taipei, China 25.00Korea, Rep. of 14.00 Thailand 32.71

Food Weights in Consumer Price Index (%)

2. What is UK Food Inflation?• UK food inflation accounts for around 10% of the CPI• Basket of goods – fresh and processed• Sub-categories (with weights) include:

– Fresh vegetables 14%– Meat 21%– Dairy 12%

• Current rate of inflation is :

3.3% but it reached….13% (August 2008)

Fig 1: UK Food CPI Inflation 1989 – 2010 (%)

Fig 2: UK All Goods, Food and Non-food CPI Inflation 1989 – 2010 (%)

Table 1: Annual Food Price Inflation Across Selected EU Countries (2011)

Source: IMF

3. Why is Food Inflation So High?

Inflation can be caused by too much demand or by costs rising. For food it is mostly the latter in a number of ways but there are three key factors….

•World food price rises

•The price of oil

•The exchange rate

136%

107%

217%

125%

Price rises between 2006 and 2008….

Fig 3: World Monthly Price Indices (2004 = 100) (Source: FAO)

Source: IMF

Fig 4: UK/World Food Price & UK Producer Price Indices 2004–10 (%)

Source: IMF

Fig 5: US$:£ Exchange Rate 1988(1) – 2010(12)

Source: IMF

What role do oil prices play? Inter-linkages between world commodity prices due to oil:

•It is a cost – fertiliser and transport – but not clear it drives inflation strongly (Blanchard and Gali, 2009)

•Stronger via energy costs and food/oil/bio-fuel link e.g. land use in US changes affects supply

Fig 6: World Food Prices and Oil Prices 1988-2011

Source: IMF

Fig 7: UK Food Retail Market Shares 2011

Source: The Guardian, 16th August 2011

Orange Juice: Del Monte 1 Litre Tetra Single

Source: Nielsen Scantrack

Fig 8: Orange Juice: Del Monte 1 Litre Tetra Single

Fig 9: Tinned Tomatoes: Princes Plum Tomatoes Napolina 400g

0

10

20

30

40

50

60

70

1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151

SAINSBURY: BRAND LABEL ASDA: BRAND LABEL SAFEWAY: BRAND LABEL SOMERFIELD: BRAND LABEL KWIK SAVE: BRAND LABEL

Source: Nielsen Scantrack

Fig 10: Use of Sales by retailer

4. Conclusions• Food is an important part of the UK economy• Food prices add 10% to retail prices• Food inflation high at present and peaked at 13% in 2008• Cost pressures have created inflation• Impact of global food price movements is important• Oil prices have an indirect effect through bio-fuel policies• Exchange rates matter too• Remember though we don’t consume raw food and retailers

have a big say in what we pay for food