Commodity boom means double hit for food groups
Wheat and soy are at their highest ever levels while coffee and cocoa are more expensive than they have been for decades and there are no signs of a let-up any time soon.
Already French Prime Minister Francois Fillon has accused the food industry and retailers of profiting from the sharp rise in commodity prices, while others say interest rate cuts in Europe and the United States may help stoke this food inflation.
Demand continues to rocket as supply dries up due to poor weather in key growing areas, alternative use for biofuel production and burgeoning demand in fast-growing economies such as China and India.
Adding to upward pressure on prices, investment funds%26#39; near-obsession with commodities has intensified as global stock and bond markets continue to struggle, and they see commodities as a good bet for their capital amid a global inflationary environment.
Analysts say strong food price inflation is likely to last through 2008 and the increased gap between value-priced products and premium-priced foods may tempt shoppers to go for the cheaper options as downturn fears grip Europe and the United States.
%26quot;Higher prices tempt more supply on to the market, but will also ration demand,%26quot; said Edward Hands, senior portfolio manager at Commerzbank Alternative Investments.
%26quot;People will start to make choices %26ndash; do I have expensive prepared food or go back to basics. This is not something people of my generation have been used to. . . We%26#39;re in for a seachange in mentality,%26quot; he added.
But some analysts say this food inflationary pressure can be contained with Martin Deboo at Investec Securities saying that food products account for only 9 per cent of UK consumer%26#39;s wallets compared to 12 per cent in the last UK recession in 1991.
%26quot;There is a risk to premium-priced products but I think they are relatively immune, and the inflationary pressures can be contained,%26quot; he said.
Europe%26#39;s top food groups such as Nestle SA, Unilever Plc/NV and Cadbury Schweppes have increased their prices to offset the rise in commodity prices, but the prices keep on rising.
For a UK company like Premier Foods which is a big user of wheat for its Hovis breadmaking the effect has been dramatic with its share price halving since the start of this year and the stock off 8.8 per cent at 86%26frac12; pence by 1200 GMT.
France%26#39;s Fillon pledged to attack market %26quot;abuses%26quot; after a high-profile report showed the price of grain and milk-based products surged in France in recent months, and he added price surveillance measures will be stepped up.
%26quot;There are clearly abuses on the part of industry and retailers who are profiting from increases in agricultural commodity prices to increase their margins,%26quot; he said.
The world%26#39;s biggest food group, Nestle, was one of the first to react early in 2007 and raise its prices for its Nescafe coffee, KitKat chocolate bars and babyfoods to offset soaring commodities prices, and others were quick to follow.
Cadbury saw its milk and cocoa prices rise and Unilever suffered as vegetable oil and tea prices increased, while all have faced higher mineral oil prices which have raised production, packaging and transport costs.
The pressures show no sign of abating with the Chicago Board of Trade corn, soybean and wheat markets rising 15 to 21 per cent since the start of this year, while US cocoa is at a 24-year high and arabica coffee at a 10-year peak.
Wheat prices have been driven higher by drought in key growing such as Australia, Eastern Europe and northern China, export restrictions in Argentina, Russia and Kazakhstan coupled with growing demand in countries like India and China.
US spring wheat, used to make high protein flour, hit an all-time high on Monday, and US wheat inventories are projected to reach their lowest level in 60 years by the end of the marketing year on May 31.
