Why are Food Prices So High? Wyn Morgan Sixth form Conference 27th June 2006

Outline 1.Do Food Prices Matter? 2.What is UK Food Inflation? 3.Why is Food Inflation So High? 4.Conclusions

Do Food Prices Matter? Some questions…… How important is the food industry to the UK economy? What proportion of our income goes on food?

Retailing & Wholesaling 1,347,000£32.9bn Processing 401,000£24.5bn Agriculture 441,000£6.8bn Imports £32bnExports £14bn Employment & Value in the UK Food & Drink Chain Source: DEFRA

China, Peoples Rep. of Malaysia Hong Kong, China Philippines India Singapore Indonesia Taipei, China Korea, Rep. of Thailand Food Weights in Consumer Price Index (%)

2. What is UK Food Inflation? UK food inflation accounts for around 10% of the CPI Basket of goods – fresh and processed Sub-categories (with weights) include: – Fresh vegetables 14% – Meat 21% – Dairy 12% Current rate of inflation is : 3.3% but it reached…. 13% (August 2008)

Fig 1: UK Food CPI Inflation 1989 – 2010 (%)

Fig 2: UK All Goods, Food and Non-food CPI Inflation 1989 – 2010 (%)

Table 1: Annual Food Price Inflation Across Selected EU Countries (2011) Source: IMF

3. Why is Food Inflation So High?

Inflation can be caused by too much demand or by costs rising. For food it is mostly the latter in a number of ways but there are three key factors…. World food price rises The price of oil The exchange rate

136% 107% 217% 125% Price rises between 2006 and 2008….

Fig 3: World Monthly Price Indices (2004 = 100) (Source: FAO) Source: IMF

Fig 4: UK/World Food Price & UK Producer Price Indices 2004–10 (%) Source: IMF

Fig 5: US$:£ Exchange Rate 1988(1) – 2010(12) Source: IMF

What role do oil prices play? Inter-linkages between world commodity prices due to oil: It is a cost – fertiliser and transport – but not clear it drives inflation strongly (Blanchard and Gali, 2009) Stronger via energy costs and food/oil/bio-fuel link e.g. land use in US changes affects supply

Fig 6: World Food Prices and Oil Prices Source: IMF

Fig 7: UK Food Retail Market Shares 2011 Source: The Guardian, 16 th August 2011

Orange Juice: Del Monte 1 Litre Tetra Single Source: Nielsen Scantrack

Fig 8: Orange Juice: Del Monte 1 Litre Tetra Single

Fig 9: Tinned Tomatoes: Princes Plum Tomatoes Napolina 400g Source: Nielsen Scantrack

Fig 10: Use of Sales by retailer

4. Conclusions Food is an important part of the UK economy Food prices add 10% to retail prices Food inflation high at present and peaked at 13% in 2008 Cost pressures have created inflation Impact of global food price movements is important Oil prices have an indirect effect through bio-fuel policies Exchange rates matter too Remember though we dont consume raw food and retailers have a big say in what we pay for food