FAO Worried About Weaknesses in Food Supply Chain
Why Supermarkets Cannot Do Much About Price Rises
May 23, 2008
David Wighton, Business commentary
When beans and barley become a sexy business, you know that something has changed and it is very unnerving.
The Food and Agricultural Organisation of the United Nations has been issuing frequent warnings over the past 18 months that food supplies have become a problem and consumers now feel it in their pockets. But there is still a suspicion that this is all a terrible conspiracy by speculators against the public.
Blundering late into the controversy, Alistair Darling, the Chancellor, has adopted the guise of an Edwardian President of the Board of Trade - or at best a member of a previous Labour government's Prices and Incomes Board - by summoning food producers and retailers to Downing Street explain their behaviour.
Thankfully he did not ask the supermarkets for concerted action on costs and prices. The last time a minister urged them to do that over milk they ended up in trouble with the competition authorities.
Both sides described the meeting as productive. The supermarkets said there was no sign of an early end to the upward pressure on food prices. Mr Darling asked the supermarkets to keep him informed. The clear message of the meeting was that there was little that either side could do about it.
British supermarkets provide good value for money, as anyone who has shopped for food in many other countries will know. There is no conspiracy behind rising food prices and this is not a bubble, contrary to what some pundits will tell you. There is speculation - investors bet on trends but the point is that those buying oil, wheat and corn futures have been getting the trend right and winning their bets.
Food prices at the global level, notably dairy and wheat, are now beginning to dip after last year's huge surge and they could fall further. Unlike oil, the supply response to grain price increases can be rapid, as quick as the next harvest.
Iain Ferguson, chief executive of Tate & Lyle, yesterday called for a sense of perspective. He pointed out that food now accounted for about 10 per cent of disposable income, against about 40 per cent in the 1950s. He forecast that commodity prices would fall in two or three years as farmers invested more.
But what worries the FAO is the weaknesses in the food supply chain. There is pressure on land, the cost of fertilisers has soared, there is a shortage of ships that carry grain and there are more wealthy people eating more food in the Middle East and the Far East.
It might have made more sense for Mr Darling to call in supermarkets in the past, when their huge purchasing power appeared to have put given them ultimate control over prices. For decades, the huge superstore discounting machine worked a treat for us living in the post-industrial world. Clutching our cheap iPods, dressed from head to toe in cheap cotton milled in Asian sweatshops, we are now surprised that these Asians are eating their way into a mountain of surplus food that we thought belonged to us.
The shoe has migrated to the other foot and producers are ripping the pricing power from retailers. It will not last for ever, only so long as it takes to irrigate and till more land and to build grain terminals and bulk carriers.
That will take several years. It requires huge investment, in farms, in infrastructure and in agricultural technology. Without high food prices, the investment will not happen. It will take time for the world to compensate for the past three decades of low investment in food and there is little that the supermarkets or Mr Darling can do about it.