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Australian consumers facing increasing food prices

Mick Keogh - Wednesday, January 27, 2016

Food prices are always a 'hot-button' political issue globally, especially in developing nations where elevated food prices have triggered civil unrest and regime change over the past decade. Food prices have not commonly been a contentious issue in Australia, where a combination of high per capita levels of national agricultural and food production, and a fiercely competitive retail food sector have kept prices in check for extended periods. Food prices are likely to become a much bigger issue in Australia in the near future, however, as all the signs indicate that Australia's decade of low food prices is about to come to an end.

The recent history of Australian and global food prices is neatly summed up in the following graph. It shows trends in the Australian Consumer Price Index (CPI) and the major food components of that index since the year 2000, and it also shows the global food price index compiled by the International Monetary Fund (IMF) over the same period, with all the indices converted to a baseline of 100 for the first quarter of 2000.

Looking first at global food prices, the graph shows that there was a major and sharp increase in prices during the soft commodity price shock of 2007-08. This was moderated somewhat by the onset of the Global Financial Crisis which followed, but international food prices again escalated sharply in 2010 and those relatively high prices were maintained almost to the end of 2013. Historians and economists would not be surprised that, as a result, a period of major civil unrest (the 'Arab spring') commenced in 2011, and was focused in those nations in regions like the Middle East that are major food importers.

Consumers in Australia largely avoided this substantial increase in food prices, as can be observed by comparing the Australian CPI with the Australian food CPI over this period. While the Australian food CPI increased marginally in comparison with the overall Australian CPI, the changes were much more modest than occurred internationally. 

A major factor in this, of course, was the very strong appreciation of the Australian dollar over the period from 2010 to 2014, which made Australian food exports expensive on global markets (and hence less in demand) and which also made food imports into Australia relatively inexpensive in $A terms. It was unsurprising that the value of Australian agricultural imports during this period jumped from $A 9 billion in 2007/8 to $A 14 billion in  2013/14. Both these factors, in combination with an intensely competitive retail food sector (the impact of the $1 per litre milk price wars that commenced in 2011 is evident in the graph and an example of this) kept Australian food prices relatively static over this period. Meat prices (especially beef) were also kept low by the relatively high rates of cattle slaughter that occurred during 2012 and 2013, a consequence of persistent drought in northern Australia.

Australian fruit and vegetable prices are more volatile than other food prices, due to the impact of the weather on supplies, and also because there are relatively few imports of fresh fruit and particularly vegetables into Australia.

The slowdown in international economic growth rates, in combination with global agricultural production increases triggered by the earlier period of higher prices, resulted in global food prices declining quite quickly from early 2014. However, any reduction in food prices that might have been anticipated in Australia as a result was negated by the sharp depreciation in the value of the $A that occurred in 2013, which made food imports much dearer in $A terms. This also made Australian food exports much more competitive on global markets, and hence stronger export prices also forced up domestic prices for relevant commodities.

As a consequence, Australian consumers are now going to experience a period of relatively high food prices. The trend is already evident in beef prices, as supply is now reducing and export demand remains strong, a consequence of growing Asian demand for high quality and safe food. Australian beef is also competitively priced due to the lower $A. Some fruit and vegetable products are also now sharply increasing in price, due to a combination of supply factors and growing export demand. The booming demand for milk powder exports, in combination with relatively static levels of milk production (in part a result of the 'milk wars') also means that dairy processors will increasingly be able to demand higher contract prices from supermarkets, which will put real pressure on the $1 per litre milk price policies of the major retailers.

For Australian farmers and agribusiness, a period of increasing prices will be a welcome change from the situation that has existed for most of the past decade, and should provide a chance to reduce debt and invest in capital upgrades. Australian consumers, however, will not be as happy, and it will be interesting to see how major food retailers and politicians respond to what will almost certainly be a period of more strident complaints about high Australian food prices. 

One thing is for certain - there will be little that politicians or food retailers can do to prevent food price increases in Australia - irrespective of their rhetoric!

 
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