Winter 2009

The recession and commodity prices

The global economy is experiencing its worst downturn since the Second World War. Following in the wake of the slowdown in world demand has come a sharp decline in commodity prices from their peaks in 2008. It would be very tempting to include the fall in global cereal prices in this explanation but in our view this would be a mistake. As global grain stocks remain at historically low levels and demand for agricultural raw materials is likely to be sustained, grain prices could easily move higher next year and are increasingly vulnerable to supply disruptions or demand surges.

Bucking the trend

Contrary to expectations, it is likely therefore that the combination of higher world grain prices and the inflationary impact of a significantly weaker pound, will result in UK retail food prices remaining above the levels of recent years; indeed, if the 2009 growing conditions turn out to be adverse retail food inflation is likely to remain above general inflation throughout 2009. As a result, it could be several years before the affordability of food for UK consumers returns to its 2007 level.

Cost/price squeeze for food companies

For food and farming businesses, the strategic implications of the combination of economic recession, and sustained retail food price inflation are significant. The recent, notable shift towards greater value is in our view likely to be sustained for the foreseeable future. Businesses could find themselves trapped in a vicious cost/price squeeze caused by an upward pressure on costs – driven by the behaviour of agricultural raw material prices – and a downward pressure on prices – driven by recession, declining food affordability and the search for greater value.

Rationale for closer supply chain relationships

This re-enforces the need for food companies to work even closer with British farmers. In so doing, food companies would not only be able to secure supplies of raw materials at prices that avoid the vicissitudes of currency fluctuations but also – as the recent rapid change in market conditions makes clear – greatly improve their competitive advantage by being able to respond more rapidly and effectively to unanticipated changes in supply and demand. Moreover, aided by the significant fall in the value of sterling, food and farming companies have a golden opportunity to win back some of the significant market share lost to food imports over the past decade.

Figure 1: Historic cycle of commodity boom and bust
Figure 3: Wheat stocks to use ratio
Figure 4: Cost/price squeeze for food companies
Figure 5: UK trade balance in food, feed and drink 1991 to 2008

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