Geopolitics still pushing up food prices – Investors’ Chronicle – Investors Chronicle

The most recent RBI monetary policy committee minutes, released this week, show there is still a concern: “Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory,” the committee warned.

Tomato prices rose by up to 450 per cent over the summer, with food inflation of 12 per cent in July the highest level since January 2020. Fast food restaurants, eager to protect margins, removed tomatoes from their menus in response. Also in India, a block on exports of non-basmati rice “appears to be a warning shot of escalating food protectionism”, according to Capital Economics. It forecasts a 10 per cent drop in global rice exports in 2023-24. 

Those dynamics – weather hitting supply and trade blocks – Mean grocery prices are a persistent driver of inflation. Beyond fresh produce such as tomatoes, prices of globally-traded commodities like grain and olive oil have soared due to geopolitical tensions and heatwaves. These factors have outweighed a drop in input costs such as fertiliser and gas. 

The UK’s supply of fresh fruit and vegetables could soon be in the crosshairs again, after supply shortages earlier this year led to supermarkets limiting the number of salad items shoppers could buy. Morocco, a major exporter, is contending with record-breaking heatwaves. 

Mintec analyst Harry Campbell said that “the effects of the heatwave are expected to resonate through supply chains and market dynamics during the harvest of the various horticultural products impacted”.

Meanwhile, there has been some easing in the UK on grocery inflation, but only in terms of growth slowing marginally. Grocery inflation fell for the fifth month in a row in July. Annual prices rose by 14.8 per cent in the month, according to the Office for National Statistics (ONS), down 2.5 percentage points from June. Milk, bread and cereal price movements drove the slowdown. 

However, agricultural commodity price pressures have been reignited by Russia pulling out of the UN-brokered Black Sea Grain Initiative, which allowed Ukraine to safely export food and fertiliser from three key ports. Russia has since attacked Ukrainian grain storage facilities and threatened trading vessels in the Black Sea. 

According to HSBC Global Research analysts, “the price of wheat recently tracked at around twice the average pre-pandemic (2015-19) level, while corn and soybeans have been around 50 per cent higher than the pre-pandemic prices”. Rice prices recently rose to their highest level since 2011. 

Weather will also continue as a limiting factor on produce levels. An El Niño weather event hit in June, warming sea temperatures. HSBC said such occurrences “are typically correlated with reduced grain supply and yields, and higher grain prices”. 

Hip pocket impact

At the same time, supermarkets are still fighting for market share, lessening the impact on consumers. Asda chief financial officer Michael Gleeson said last week that the supermarket is passing on cost savings to shoppers “wherever we are seeing reductions in commodity prices – such as [with] wheat and milk”. The supermarket’s like-for-like sales, excluding fuel, rose by 9.6 per cent in the second quarter.  

Market volumes have weakened of late, however, hurt by wet summer weather and the elevated pricing environment. The ONS said that food stores sales volumes fell by 2.6 per cent in July, with retailers reporting that the “increased cost of living and food prices continued to affect sales volumes”.

A key result of this is customers continuing to trade down to cheaper food options, despite price inflation slowing. Kantar highlighted that sales of own-label goods in the UK rose by 9.7 per cent in the 12 weeks to 6 August, well ahead of branded growth of 6.4 per cent. The market researcher said that discounter Aldi was the fastest-growing retailer for the fourth month on the trot. This turning to the discounters isn’t good news for the more expensive retailers such as Ocado (OCDO).  

Elsewhere amongst the listed operators, Tesco’s (TSCO) grocery market share has risen slightly against last year, while J Sainsbury’s (SBRY) share is flat.