What high food prices mean for business

High food prices are good for farmers. Low food prices are good for consumers.

According to the UN’s Food and Agriculture Organisation (FAO), food prices last month surpassed their previous high in 2008.
 

FAO Food price indices January 2011

Russian, Canadian and Ukrainian farmers had a tough year in 2010, but other farmers are chortling. High prices put cash in their pockets and give them an incentive to plant more crops.

High food prices fatten traders, too. America’s Cargill, the world’s biggest trader of raw foodstuffs, tripled its profits in the second quarter of its fiscal year.

For makers of processed foods, costly raw materials are a problem. ConAgra, General Mills, Kellogg’s and Kraft recently raised prices for many of their wares. In December ConAgra, which makes Slim Jim meat snacks, among other delicacies, reported a 16% decline in second-quarter profits. Like other food makers, ConAgra is experimenting with smaller packages sold at the same price.

For retailers food inflation is “moderately good”, says Christopher Hogbin at Bernstein Research. Their share price tends to rise as investors expect higher margins. Commodity-price rises are usually passed on to consumers only after a six-month lag, thanks to forward-buying by food-makers.

Grocery shoppers will react by buying more discounted items and more private-label products, which are 30-50% cheaper than branded goods. They will also buy cheap chicken rather than dear beef, potatoes rather than mangetout and plain milk rather than fancy yogurt concoctions.

Private-label makers will sell more, but since raw materials are a higher proportion of their total costs (they don’t advertise as much as posh brands), they will suffer. Most will lose more than they gain from food-price inflation. If it continues, they will have to raise their prices too. But Mr Weisser is optimistic that supply bottlenecks will soon ease. “Next year prices will come down,” he says. “Farmers have so many incentives to plant more.”