The rise in food prices will continue for a long time

Spanish households are experiencing an unprecedented situation with the shopping basket: never before has food risen in price at the current rate, close to 16% year-on-year in October.

Thomas Osborne
Thomas Osborne
26 November 2022 Saturday 22:31
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The rise in food prices will continue for a long time

Spanish households are experiencing an unprecedented situation with the shopping basket: never before has food risen in price at the current rate, close to 16% year-on-year in October. And the correction will not be quick. The consensus among the entire value chain and analysts suggests that the fund flows responsible for the increase may take time to stop. We will have to wait a while for consumers to notice a substantial moderation in the escalation of prices.

To see how exceptional the situation is, all you have to do is take a look at the historical series of the CPI. Food inflation has evolved in parallel to the general index except in a few moments. One of them took place starting in 2007, with a crisis of raw materials – with investment funds such as Lehman Brothers involved – which led the CPI for food to a peak of 7.4% in June 2008. The consumer crisis The later yielded a negative CPI, that is, prices fell. Until in 2012, the rise in VAT promoted by the then Minister of Finance, Cristóbal Montoro, triggered food inflation again, reaching a CPI of 4.6% in July 2013.

Minutiae if compared to the current rally. The start of the invasion of Ukraine just sent food prices skyrocketing. Have we hit the ceiling? “You can expect a drop in food inflation; However, it remains to be seen if it is considerable”, underlines Miguel Cardoso, chief economist at BBVA Research. They may not become more expensive at the speed seen now, but it is very likely that it will take time for price developments to slow down enough.

The cost of energy, which reached maximums in March of this year, began to moderate in August, not naturally, due to supply and demand, but due to the corrections applied by the Government. At the moment, and in the absence of the CPI data for November, which will be published this Tuesday, it continues to become more expensive, although at a rate well below the first half of the year. It has not dropped in price compared to last year, according to the INE, it only slows down its rise.

Energy was the first element that multiplied the costs of food production. "Now that it is tending to decrease, together with the normalization of international merchandise traffic, some relief can be expected in the inflation of these products, but there are other factors that push prices and that do not seem to be reversing in the short term" adds Cardoso.

Among them, the increase in the price of fertilizers stands out. As with some cereals, Ukraine served as a great global supplier of these essential goods in agriculture, and the market is still working to find a substitute that meets the magnitudes provided by the country now at war with Russia - production has fallen by 15% and 20%–. The cereal futures market marks a trend towards price moderation, which will still take some time to be noticed in the agri-food industry. Other vectors, on the other hand, point to an upward path, thus offsetting the decline in the price of cereals. Among the raw materials, sugar stands out, present in a large number of processed foods. Its international price, although with fluctuations, has been increasing since April 2020 due to strong demand. It is no longer only used for the food industry: the biofuels sector is now a large consumer of sugar, which it obtains from cane or corn. The higher the demand, the higher the price. "There is also an element of increased costs and reduced supply of some foods due to the weather, the lack of rain," says Javier Ferri, a Fedea researcher and professor of Economics at the University of Valencia.

“The price of water in the irrigation communities has risen between 40% and 50% this year; we are supplying ourselves thanks to the desalination plants," says Andrés Góngora, head of fruit and vegetables at the agricultural organization Coag and a tomato producer in Almería. This increase in costs that has been pressing since the beginning of the food chain and the current overproduction of some vegetables, caused by the mild temperatures, has thrown down prices at source. “We are working at a loss, the price of tomatoes at origin has gone out today [por el viernes] at 51 cents per kilo, when in stores it is usually above one and a half euros; This increase in the final price of unprocessed foods is not justified ”, he considers.

The legislation applicable to the food chain requires the costs of each of the links to be added to the prices at origin, where transport, energy and wages are also rising, highlights Ignacio Magarzo, general director of Asedas, the Association Spanish Distributors, Supermarkets and Supermarkets that brings together companies such as Mercadona, Lidl, Dia or Consum. In this regard, Miguel Cardoso, from BBVA Research, points out that distribution works "with very tight margins and high competition", so the situation does not point to an unjustified increase in margins in a general way, he concludes.

In any case, industry and analysts agree that the situation is not likely to turn around anytime soon. The shopping cart will continue to be at high levels for a while.