Retail food prices to remain steady for next two years

The price of food in the shops is expected to remain steady for the next two years, despite food price inflation now slowing.

Figures from the British Retail Consortiumshow that annual food inflation fell to 3.8% in July, although this was still well ahead of overall shop price inflation, which came to just 0.5% last month.

“Food inflation is now the lowest it’s been for more than a year and half,” said Stephen Robertson, director general at the BRC. This had been helped by the dramatic fall in commodity prices, including corn, wheat and dairy, which are down by an average of 40% year-on-year.

But retail customers are yet to benefit from lower commodity prices, said Phil Bicknell, senior economic adviser at the NFU. “The reality is that the on-shelf price doesn’t bear a huge resemblance to farm-gate prices.”

DEFRA figures showed that ex-farm prices in May for a range of products including cereals, fruit and vegetables, meat and dairy, had fallen by 7% year-on-year. But retail prices continued to rise.

“There are issues in terms of the robustness of the farming and food supply chain – getting an equitable return for what farmers are producing is essential to safeguard future supply,” said Mr Bicknell.

Sion Roberts, chief executive of English Farming & Food Partnerships, said the conflicting pressures of recession against longer-term tightness of food supplies posed important questions for producers and retailers alike. “For 25 years food became more affordable, year in, year out. But that stopped two years ago.”

Food was now becoming less affordable, creating intense price competition among retailers, and pressure on premium lines. “It is a big break in a long-term trend. People have to think about what that means for the markets they operate in.”

Growing world demand for food, combined with high oil and fertiliser prices, and the threat of climate change and water shortages, meant the global food market was moving from one of excess supply to excess demand. “Global agriculture has reached a tipping point and life will never be the same again for food processors and manufacturers,” said Mr Roberts.

Greater volatility in commodity prices and availability meant food processors and retailers would have to rethink their strategic relationships with suppliers. Integrated food chains with longer-term contracts would become increasingly important, particularly for niche and high-value products.

“The balance between supply and demand is going to look very different over the next quarter century. We are moving from a world of low agricultural prices to one in which always seeking the lowest prices may be self-defeating. The strength of evidence should now be influencing the strategic planning by both the suppliers of agricultural products and their food company customers.”