Food prices to rise as harvests suffer

With consumers already strapped for cash, the indications are that a period of low inflation is abou…

Office for National Statistics data indicates that food inflation slowed to 2.0% in June 2012, the slowest rate since the 1.7% reported for June 2010.

But a Shore Capital note about UK Food Consumer Price Index (CPI) issued late last month stated: "We entered 2012 with an expectation that food inflation in particular would ease dependent upon a 'normal' northern hemisphere harvest."

Concern for food prices

However, Shore said it now had increasing concern that food prices may be set to rise through Q3 and Q4, on the back of firmer cereal prices now expected in the next year due to harvests worldwide.

And consumer income was set to remain under pressure: "If inflation remains more resilient than expected, that may ease any concerns that the broader UK food industry like-for-like sales growth could follow industry volumes into negative territory. However, it will not help in delivering a much needed crutch to industry volumes."

Alex Waugh, director general of NABIM, the millers' trade body, said the outlook was "very bad" with regard to wheat, with prices having shot up due to the worst drought in 50 years in America, which has brought record temperatures. At the same time, the UK has seen the highest rainfall since records began, which has caused disease in crops.

Price rises inevitable

Price rises would be inevitable as supply was reduced, he said: "It is not looking promising in terms of reduced output."

And Caroline Bain, senior commodities editor/economist at the Economist Intelligence Unit said: "some upward pressure on food prices, particularly of staples and potentially meat" was expected.

She said: "The droughts in the US and Russia/Kazakhstan and parts of the southern hemisphere have led us to revise down our estimates of global production of maize, in particular, but also soybeans and wheat. International benchmark prices of these crops have already risen strongly on the back of the poor harvest outlooks."

Wheat stocks were much more comfortable, she said with reserves to draw on to plug any gap in the market. However, wheat is a substitute for maize and the lack of maize in the market will also lead to upward pressure on wheat prices, she said.

Currently, international livestock prices were not reflecting the higher likely cost of feed (at least maize-based feed) but this can be expected to start to come through as the year progresses, she added.