Will food prices ever come down?

Last updated 16:43 07/04/2008

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As households feel the pinch from rising food costs, consumers may well be asking under their breath if prices are ever coming down.

Food prices were up 9 per cent in the year to February. Bread prices are soaring, dairy commodity prices have doubled.

Two factors copping most of the blame – the burgeoning wealth of developing countries and the biofuels industry – are unlikely to disappear soon.

China, India, and other emerging economies are driving up demand for meat and dairy products, while increased demand for grain to make biofuels is sending grain prices soaring and reducing available arable land.

"The pressure on food prices will remain as Asian households become wealthier," said Andrew Gawith, a director for economics forecaster Infometrics.

Supply has not responded immediately, and Mr Gawith said it would be some time before it caught up.

Grain prices "are likely to stay higher for a bit – two or three years" but he said it was difficult to predict beyond that.

"I don't think food or consumer prices will rise higher but I don't think they will fall much."

Consumer resistance usually also comes into play, he said.

Already some people are eating less cheese, which doesn't stimulate production.

Westpac chief economist Brendan O'Donovan believed there was more pain to come for consumers.

"A lot of price increases are still in pipeline yet. We haven't seen the feed-through into prices, which will be over next three to six months."

Mr O'Donovan said rising commodity prices were not the only factors in the food price mix.

The rising cost of oil was pushing up transportation costs, and manufacturing, processing costs and retail margins all played a part.

But as a food-producing nation, he said, New Zealanders do gain some benefits from the situation.

"Part of the response to the higher dairy prices has been a higher exchange rate, so all of its consumers have been effectively been given a real wage increase.

"You might be paying more in food but it's making all your imported goods cheaper."

The world is also seeing quite a large supply response, Mr O'Donovan said, with United States wheat plantings the highest since the 1940s.

Australia's drought, which put further pressure on grains prices, was also easing.

However, he thought none of that would stop elevated prices persisting for the next decade or two, as the world absorbed emerging economies into the global production system.

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"Over very long periods of time, food prices tend to decline relative to other prices. You get periods of aberration from that – and I think that probably over the next 10 to 20 years we'll have one of those periods."

Short-term commodity cycles were not dead and gone, either, Mr O'Donovan said.

Dairy commodity prices were already coming back after "going ballistic," although over the next decade he expected them to be 50 per cent above where they were today.

Across the Tasman, Australians were also being warned not to expect any reprieve from food prices.

Kym Anderson, Professor of Economics at Adelaide University, said last week that food prices had risen internationally by 75 per cent since 2005, largely due to the price of oil.

"It's really petroleum prices that have gone up and that has encouraged both Europe and America to set targets to move towards biofuels and that is driving up the demand for corn in the United States and for rape seed (canola) in the EU and also for sugar in Brazil because sugar is a source of ethanol."

In Australia, the drought had kept red meat prices down because farmers were slaughtering stock early.

"But if grain and oil seed prices remain high, then in the longer run, red meat and even chicken and pork prices will have to go up as well," Prof Anderson said.

Back in New Zealand, cheaper fruit and vegetable imports from China have raised the heckles of those promoting local growers.

Mr Gawith said the move towards farmers markets, buying locally and discouraging food miles was likely to be a growing trend, but cost was always going to be an issue.

Local garlic growers, for example, had labelled their products to capitalise on the movement, "but certainly if New Zealanders were poorer than they are now, Chinese garlic would be on the table."

One more trend which observers say is partly responsible for driving up food prices is commodity investment.

Investment funds have been pouring money into the relatively stable world of commodities instead of volatile stocks and bonds.

Wheat and soy are at their highest ever levels while US cocoa recently hit a 28-year high and arabica coffee was at a 10-year peak.

Analysts in Europe expected strong food price inflation to last through this year at least, and may lure many consumers away from premium-priced products.

"Higher prices tempt more supply on to the market, but will also ration demand," said Edward Hands, senior portfolio manager at Commerzbank Alternative Investments.

"People will start to make choices – do I have expensive prepared food or go back to basics. This is not something people of my generation have been used to. . . We're in for a sea change in mentality," he said.

- NZPA

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