Rising food prices and farm incomes
This post was written by Alan Matthews
Aideen Sheehan has a piece on food prices in today’s Irish Independent reporting that prices of some popular branded foods have risen by 7% over the past 8 months compared to prices in a survey conducted by the National Consumer Agency last summer. However, the real story in recent months has been the remarkable stability in food prices despite soaring commodity prices on world markets.
It is plausible that we will face higher food prices in coming months, but the official figures for food price inflation compiled by the CSO show no rise in food prices over the past 12 months – the index (base Dec 2006 = 100) was 101.2 in January 2010 and 101.1 in January 2011.This followed a fall of -8.1% in the index in 2009.
The stability in the index during 2010 is rather remarkable given the sharp rise in food commodity prices over this period. Partly it is explained by the fact that consumer retail prices for food are more influenced by movements in non-food costs given the relatively low share of food raw material costs in what consumers spend on food at retail, but it may also indicate that, at last, we are seeing some real competition in the Irish grocery market over this period.
As Joe Gill of Bloxham stockbrokers notes in the Independent article, rising food prices are a double edged sword, potentially benefiting food companies and farmers while penalising consumers. However, part of the reason for rising food prices is rising energy and other costs, so whether farmers and food companies benefit from rising food prices depends on their exposure to these costs.
I present below two graphs showing movements in farmers’ output and input prices using data from the CSO’s excellent Statbank. The long period graph shows how farm input costs have risen faster than output prices over the period 1995-2010. The output price index has been influenced by trade liberalisation and, more importantly, CAP reform over this period. Farmers were compensated for the reduction in output prices due to CAP reform by increased direct payments.
The second graph shows price trends in the more recent period since the start of the first food price spike in 2007-08. Apart from a small upward movement in agriculture’s terms of trade (the ratio of output to input prices) in the last half of 2007, the terms of trade deteriorated for all of 2008 and much of 2009. Output prices started to recover in the last quarter of 2009 and, by end 2010, farmers’ terms of trade had just returned to where they were at the outset of the recent period of food price volatility. More recently, input prices have again started to accelerate putting the agricultural terms of trade under pressure.
While a 1 per cent change in output prices has a larger impact on farm incomes than a 1 per cent change in input prices, we should be careful in assuming too readily that higher food commodity prices necessarily translate into a bonanza on the farm.