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Food fight Add to ...

While someone is making big bucks from the rising cost of food, governments are searching for villains, but the jury is still out.

The UN is setting up a task force to tackle the global food crisis as rice-growing nations in Asia hoard grain. Fear of famine is pushing up prices for the very poor in the developing nations, but in the more comfortable world of the EU, politicians are investigating more subtle restraints of trade. In Brussels, the European Commission is pointing accusing fingers vaguely at the food distribution chain.

Someone is getting too much of the pie, reckons Marianne Fischer Boel, the agriculture commissioner. According to the Commission, only two-thirds of the rise in the cost of food in Europe is attributable to increases in the cost of ingredients.

Wheat has doubled in price but that should have translated into a 3-per-cent rise in the price of bread. However, the cost of a loaf has gone up by 10 per cent in the EU. Likewise, the wholesale cost of eggs is up 17 per cent, which might account for a 12-per-cent rise in retail prices, not the actual 15-per-cent surge.

In Britain, a lengthy Competition Commission inquiry into supermarkets has published its conclusions. The third such investigation in a decade has failed to find any hard evidence of skulduggery. There is a new competition test - a sop to the outrage of proprietors of small grocers (which complain that supermarkets put them out of business) and there will be an ombudsman to arbitrate disputes between stores and their suppliers, but this is piddling stuff. The retailers have won with a straight flush.

Or so it might seem. There is, however, tentative evidence that the supermarket behemoths are no longer the unchallenged bullies of the global supply chain. We know that selected groups of primary food producers, mainly large-scale crop farmers are making good money.

Also upstream, the profits for agrochemical firms have risen in leaps and bounds; suppliers to the farming industry - the seed, feed and fertilizer merchants - are often doing better than the farmers themselves.

In Britain, dairy farmers, a long-suffering group, have pushed through several milk and cheese price increases, which seem to be sticking. More interesting are the surges in revenue among big food processors.

Multinational food companies are slapping new prices on their products faster than you can race a cart down a supermarket aisle. Associated British Foods, a leading British flour miller and baker, said recently it would raise its prices again, apparently expecting no resistance from retailers. Its aggressive stance matched that of Nestlé, the Swiss chocolate and infant formula giant, which in April revealed a thumping 9.8-per-cent sales increase for the first three months of 2008. Within that number, 4.2 per cent was volume, implying a 5.6-per-cent price surge.

It was not that long ago that a conversation with an executive from a food manufacturer would quickly degenerate into a lengthy whine about the tough environment, the power of retailers and price deflation. Today, the shoe seems to finally have moved to the other foot and the food barons are passing on the cost of their raw materials with barely the blink of an eye.

The Swiss firm is joined by Britain's Unilever, which attributed half of a 6-per-cent revenue gain to price increases while sales at Danone of France gained 11 per cent in the first quarter, most of it from price increases. Can it really be true that food manufacturers are finally getting their pound of flesh at the expense of retailers?

Government statistics in Britain suggest something like that may be going on. The March producer price indexes showed manufactured food products rising by 8.5 per cent, while at the retail end, the consumer price index showed gains of only 5.5 per cent, despite big increases in other food retailer costs, such as energy.

Of course, we don't really know, because the relationship between retailers and their suppliers is notoriously opaque. Government statistics are not subtle enough to capture all of the hanky panky between suppliers and supermarkets, the under-the-table discounts and payments relating to shelf positioning and promotional sales.

What we do know is that the world is changing very quickly. Long seen as the tail-end of the food chain, the farmer is now wagging the retailer's dog. It may all end in tears for food producers, but if the price inflation doesn't quickly abate, it could be bad news for retailers. For the first time in decades, they could find themselves sandwiched between an aggressive supplier and an impoverished customer.

 

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