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Pressure on crops forces further rise in food prices

12 August 2010 by
Pressure on crops forces further rise in food prices

Poor harvests and increases in the cost of animal feed and transport are driving food inflation, but can the hospitality sector deal with the pressure? asks Daniel Thomas.

Since what was an annus horribilis for food costs in 2008, when prices of certain key commodities rose by as much as 35%, hospitality operators have benefited from a largely benign market. But dreaded "food inflation" has reared its ugly head again in recent weeks, especially in light of the Russian government's banning of grain exports for the rest of the year.

The price of a range of foods including bread, pasta and even meat looks set to rise after wheat prices jumped to £4.95 a bushel - the highest figure for almost two years - following last week's announcement.

While increases in food costs can take as long as a year to reach consumers, annual food inflation is already on the up, rising from 1.7% in June to 2.5% last month, with the price of meat and fruit among the biggest risers, according to the British Retail Consortium (BRC) and Nielsen.

"The recent dry weather has increased the price of animal feed and poor harvests have reduced some fruit crops," said Stephen Robertson, BRC director general.

"Problems with production in large wheat exporting countries, such as Russia and Canada, could put pressure on overall food inflation in the coming months."

The report revealed that a drought in Australia, as well as floods in Canada, Pakistan and India had helped to drive up wheat prices by almost 50% since June. It warned that the price of commodities including palm oil, cocoa and soya oil had also risen sharply.

While the monthly BRC/Nielsen report is focused on shop prices, food inflation does of course have a major impact on the hospitality industry.

Food service consultant Chris Stern said rises in food costs have the potential to be "a major problem". "Lots of organisations, especially in the public sector, are trying to drive down their subsidies and many are already struggling with this," he said. "Food price inflation will just put them under more pressure."

The British Hospitality Association said food price rises will be "very unwelcome" at a time when there are many other cost increases for restaurants and it's difficult to raise prices in the face of consumer resistance.

Peter Backman, director at food service consultancy Horizons, said he has become "very aware" of food inflation in recent weeks, particularly relating to wheat and coffee.

"Coffee is not a problem, as the price is very elastic and the cost of what goes into each cup is minimal, but with wheat it's more sinister as it goes into everything," he said. "Inflation can have a big impact on the industry, affecting confidence in the market."

Food inflation hit the hospitality sector at the worst possible time in 2008, coinciding with falling consumer confidence and rising oil prices, meaning operators' margins were badly affected, Backman said. Operators will hope oil prices stay consistent this time around, he added.

"A key factor driving up food inflation in 2008 was the price of oil - due to transport costs and so on - but if oil prices stay where they are this time, the impact will be much less."

But while there is no question that prices of certain commodities are rising, Backman warned there was the danger of a self-fulfilling prophecy. "Media loves talking about inflation as if it's a ‘bogeyman', but we have to be wary of over-egging it," he said.

Conversely, more media attention on food prices could make it easier for caterers and restaurants to pass on increased costs to the consumer, Stern said. "If it's well publicised that food prices are increasing, then customers will be less surprised at tariff increases, making them easier to implement," he said.

This point was picked up by Diana Spellman, managing director of purchasing consortium Partners in Purchasing. "The hospitality trade has a great chance to climb out of the dubious marginal discounting stranglehold created during the recession," she said.

"Reports to justify the price increases are flooding in from all the non-Governmental organisations representing their producer groups."

If the hospitality industry is successful, operators may well achieve inflationary increases to the consumer of 10%, Spellman said. But she added: "We do not anticipate food ingredients as a whole to increase by this degree over a six-month period unless further climate or political activity fuels instability."

FIVE WAYS TO COMBAT FOOD INFLATION

• 1. Scrutinise your menu Study your menu and eliminate extortionate ingredients.

• 2. Play suppliers Benchmark a range of suppliers and corroborate your findings with market research.

• 3. Simplify Don't overcomplicate things. Rely on three or four quality ingredients per menu choice.

• 4. Stay seasonal and local The difference in price between produce in and out of season can be huge.

• 5. Good housekeeping If you know Monday is going to be quiet, then prep accordingly. Don't buy too much and don't buy off spec. Order little and often.

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