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Fears over food price inflation

Retail food prices are heading for their biggest annual increase in as much as 30 years, raising fears that the world faces an unprecedented period of food price inflation.

Prices have soared as the expanding biofuels industry, climate change and the growing prosperity of nations such as India and China push up the costs of farm commodities including wheat, corn, milk and oils.

Food companies have started passing on these increases to consumers, but the prospect of sustained commodity price rises means the industry's profits could be hit as it is forced to absorb the higher costs itself.

Hershey, the US chocolate maker, this month became the first big food company to cut its 2007 profits forecast because of the rising cost of milk, and Switzerland's Nestlé warned investors last month it would not be able to cope with higher milk costs by simply raising prices.

John Parker, food analyst at Deutsche Bank, said: "There is growing concern within the food industry that the present upswing in soft commodity prices is structural rather than cyclical."

Few countries have not felt the impact of food price rises. In the US, prices have risen by 6.7 per cent, seasonally adjusted, since the beginning of this year, compared to 2.1 per cent for all of 2006, according to the Bureau of Labor Statistics.

If prices keep rising at these levels for the rest of the year, it would be the biggest annual increase since 1980.

The UK's consumer price index showed annual food price inflation of 6 per cent in April, its highest level in almost six years, and well ahead of overall inflation of 2.8 per cent. Food price inflation is lower in the eurozone at 2.5 per cent but still rising more quickly than overall prices.

In China, food costs are increasing more than twice as quickly as other kinds of prices, up 7.1 per cent last month compared to a year earlier. And in India, annual food price inflation has reached its highest levels since the late 1990s, climbing above 10 per cent year-on-year.

US research firm Bernstein estimates that its Food Commodities index, which tracks a dozen agricultural raw materials used by food companies including wheat, barley, milk, cocoa and edible oils, will show cost inflation of 21 per cent this year, the biggest increase since the index started almost a decade ago.

Economists say raw material prices are rising as supply shortages, caused in part by the growth of the biofuels industry and climate change, combine with rising demand for high-protein foods from developing countries as people become more prosperous and can afford to eat better.

Lakshman Achuthan, managing director of the Economic Cycle Research Institute, said: "With the strong upswing in economic fortunes of China and India this decade you have a very large opportunity for food price inflation."

Market observers warn that food inflation over the next 18 months could have serious consequences in poor nations, where affordability could become a significant issue.