Special edition: Food prices

China price hikes affecting global food chain

By Charlotte Eyre

- Last updated on GMT

Related tags: China, Milk

Food and ingredient prices are growing at a faster pace in
China than anywhere else in the world, having serious
repercussions for business both domestically and on an
international field.

For several years Western economies have regarded China as a source of cheap materials, labour and inexpensive food imports. However, food companies around the world now have to deal with the effects that Westernised eating habits, a booming population and higher consumer prices in China are having on the rest of the world. The country's booming population is currently gobbling up massive amounts of the world's food supply, and the country's grain demand will rise to 550m tonnes by 2010, compared to an output of 490m tonnes in 2006, according to the White Book of China's Grain Issues, released by the State Council. China will therefore have to increase its annual grain output by at least 2.5m tonnes every year until 2010 to cope with the growing population, or try to import it from elsewhere. In an article written for the Financial Times, Dow Jones financial expert Tracy Zheng said that the government has already started selling off its limited reserves. "It sold 200,000 tons of vegetable oil offered at an auction. The oil went at the high end of market prices, indicating that there is a strong domestic demand,"​ she said. "What's more,Chinawill hold auctions to sell imported wheat from reserves once or twice a month."​ To compound matters, drought weather conditions, attributed to global warming are currently affecting several grain growing nations, reducing the amount of available imports. For example, grain value is expected to undergo about a 21 per cent rise over the year to AUS$273 (€166) due to drought conditions brought on by global warming, according to the Australian Bureau of Agricultural and Resource Economics (ABARE). In the EU's 27 member countries, a lower than expected harvest in 2006 of 265.5m tonnes has led to tightening supplies at the end of the growing season in 2007. Another factor putting pressure on China's food supply is increasingly Westernised eating habits. In the past, a large part of the Chinese diet was based on fish, rice and vegetables, all available in large supplies in and around the region, whereas now the Chinese have acquired a taste for meat, eggs and dairy products. While no-one could begrudge any nation the right to decide whatever they so choose to put on their plates, certain sectors are feeling their supplies are starting to dwindle. In the dairy sector, for example, the US Department of Agriculture (USDA) last month reported that the price of milk is up 98 per cent from last year, setting the highest price on record at $21 per 100 pounds of farm milk. The US is not the only country having to pay for China's demand for dairy products, as the price of cream in the UK has jumped by 23 per cent this year, and in Australia consumers are paying 60 per cent more for skimmed milk than they did six months ago. We live in an increasingly globalised economy, and we are certainly fed thanks to a globalised food chain, (and) so no-one could pretend that these events in China will not have an effect on the rest of the world. Consumers in China are now experiencing some of the highest food prices in years, prompting fears these higher costs will now spread to the rest of the world. According to Philip Bowring writing for the Asia Sentinel, in August consumer price inflation hit a 10 year high of 5.6 per cent. "This comes on the feels of declining imports fromChina,"​ he said. "It can not be regarded as a one-off event, as it is likely to be the beginning of a sustained rise fuelled by several factors."​ Bowring argues that the Westernisation of China, resulting in a demand for higher wages, consumer spending power and richer diets, will result in food companies paying the price in the future. "Taking all factors into account it seems very likely that theChinaeffect will contribute significantly to keeping prices, and inflation, high,"​ he said. Bowring and thousand of other experts who predict "agri-flation" have had their opinions validated by the financial statements of many companies all over the world. Only last week, New Zealand Woolworth's boss Michael Luscombe warned that the company's target will be a 40 per cent reduction by 2015 against business as usual performance because of the crushing combination of export demand from China and India as well as drought weather conditions. While company bosses such as Luscombe do try to keep prices low, many companies have admitted in recent months that consumers will have to pay more. US dairy giant Dean Foods have this month been forced to up the price of milk, cream and yoghurts, "as a result of this extreme commodity environment,"​ while ingredients company Purac has announced it is increasing its prices increases for lactic acid, lactates, gluconic acid and gluconates because of the higher commodity prices. In the wealthier West, no-one envisages riots breaking out just yet, as almost happened in China last year when the price of noodles went up, but with the threat of high inflation hanging over the US and the UK, companies are certainly fearing a consumer backlash over extra costs. All is not doom and gloom, however, as some companies are still managing to make a healthy profit despite the global repercussions that China is having on the food industry. Many companies have diversified operations in recent years, turning from traditionally popular products towards processed or easily exportable brands. Russian dairy producer Will-Bill-Dann has been particularly profitable this year, with shares rocketing 132 per cent in 2007. The company's success could be due diversifying into areas such as the beauty food market, with its antioxidant drink, or the functional dairy foods arena. Many experts also believe that another way to survive is indeed to market products specifically made for Asian consumers, such as dried milk powder hot chocolate mix and certain brands of processed cheese. Mergers and acquisitions have also been popular this year, as companies reposition themselves in a complex market, either to enter into growth areas such as health and nutritional products, or to have a stronger food hold in the high growth regions of Asia and Eastern Europe. This year Nestlé, Cadbury, Diageo, Heineken, Intersnack in Germany, Unilever and Frutarom have all been in M&A deals in recent months, or are thought to be on the prowl for suitable investments.

Related topics: Policy, East Asia, Supply chain, China

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