Commodity prices continue to skyrocket

By Ahmed ElAmin

- Last updated on GMT

Related tags Meat Milk

Food processors can expect no relief in the near future from the
sharp surge in commodity prices, pushed upward by supply shortfalls
and higher global demand.

Drought in Australia, adverse weather in Europe, foot and mouth in the UK are all contributing to a short fall in the normal supply of the major commodities such as grains, meats and milk. With the massive forest fires currently raging in Greece, even olive oil processors may be paying more while chasing any supplies that make it to the market. Couple these unforeseen events on the supply side with the increased demand from China and the squeeze is on operating budgets, and perhaps even production output, as is the situation currently facing cheese manufacturers. The sharp rise in the grain market has been well documented by reports from the Food and Agriculture Organisation (FAO), which forecasts no let up in the near future. And a recent Confederation of Food and Drink Industries of the EU (CIAA) report found that manufacturers were paying 35 per cent more for wheat, an average 50 per cent more for dairy products, by 25 per cent more for sunflower oil. The CIAA statement was made in July. Since then wheat prices have hit a record high on the global markets this month, with Canada, Australia and some producing regions in Europe affected by bad weather. The International Grains Council is predicting a seven million tonne shortfall in the global wheat supply to meet demand in 2007-8, as it downgraded its harvest estimates to 607m tonnes. As a result of droughts and floods global wheat stockpiles are forecast by the US Department of Agriculture to fall to their lowest levels in 26 years. In Canada, the country's harvest output could fall by 20 per cent this year, according to official estimates. Australia's government has also warned that the country's wheat output may also be slashed due to the hotter temperatures experienced in the spring. Smaller producers in Europe are also facing shortfalls. For example Romania has forecast that drought and excessive heat meant the country will not even produce sufficient grains and oilseeds to cover current needs. The wheat harvest was only 55 per cent of last year's production, while corn and sunflower supplies have been forecast to fall by about 67 per cent. Such events have helped push prices to about $7.44 a bushel last week in the US, and to about £200 per tonne in the UK. The prices are almost double the level processors were paying this time last year. The overall grain shortfall could also mean into higher prices for meat as livestock farmers pay more for feed. The crunch is really being felt by UK meat producers and processors, who are just recovering from a recent ban on exports put on the country by the EU after an outbreak of food and mouth disease. A report by Deloitte & Touche today noted that the whole UK agriculture sector is suffering as food-and-mouth disease, fears over bird flu, and floods have taken their toll. The health of UK's livestock industry is almost at breaking point and price rises are on the cards, stated Richard Crane, a food and agriculture partner at Deloitte. "A combination of factors is threatening the survival of the UK livestock industry,"​ he stated. "The rising price of wheat and soft commodities are compounding the negative impact of foot and mouth on the UK to a much greater extent."​ Many producers are paying almost double for feed - the largest cost in producing livestock. Crane is even predicting many producers could go under, leaving processors there to search outside the country for their supplies. Only higher prices will allow farmers to continue to meet the increasing demand for local, high quality meat, he said. "This is likely to be the inevitable cost of securing and also safeguarding the future of UK meat production,"​ he said. "Without it, the opportunity to enjoy home-grown quality produce and British meat could become a rarity on supermarket shelves."​ Exporters could also face tougher times due to any repercussions that linger once foot and mouth has gone. Countries that are foot-and-mouth free do not want imports of fresh meat from those tainted with outbreaks because of the danger they may still carry the disease. "If foreign markets close their doors to UK meat exports there could be cause for concern,"​ he stated. "The export of animal by-products, such as the subprime cuts which are exported to maximise returns, will not be available. The upshot is reduced returns to the farmers and the processors which could hurt the UK's £493m-a-year meat export industry."​ Meanwhile the British Poultry Council reported that spiralling wheat prices worldwide are driving up the cost of poultry production making price rises for poultry meat in the UK inevitable. Feed wheat costs are 40 per cent higher than this time last year and almost 70 per cent higher than 2005, the organisation reported. Wheat makes up two thirds of the feed used for chicken, turkey and other poultry in Britain. Other ingredients, especially non-GM soya meal, which is used only in poultry feed in the UK, have also increased at a staggering rate. "British poultry producers and processors have not been able to recover these cost increases from supermarkets and their other customers,"​ stated Ted Wright, chairman of BPC. The Deloitte and Touche report also warns that bird flu remains a possible danger to the sector. In February 2007 major UK supermarkets announced relatively low impact of bird flu on sales of meat, Deloitte reported. Sainsbury's and Morrisons reported a 10 per cent week-on-week drop across all fresh and frozen poultry products and Sainsbury's said sales of its own-brand poultry products were down 5 per cent. "Should consumption levels of British meat drop there is a risk of job losses amongst producers and processors,"​ Crane forecast. "When a food safety crisis strikes, consumer confidence often bounces back to pre-outbreak levels if agencies and government action is swift and decisive."​ Meanwhile those in the dairy sector are in crisis. The commodity price paid internationally for skimmed milk powder has soared in recent months. Reduced milk yields due to the weather and higher demand has created the crunch. "It is evident that international demand for skimmed milk powder will impact on the UK for some years,"​ according to a report released yesterday by First Milk (see related story on "As a result, the price paid to dairy farmers will have to rise if a sustainable supply of liquid milk and cheese for the home market is to be ensured."

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