Food prices set to rise

Consumers face the prospect of rising food prices as supply is squeezed by extreme weather events, the growth in the biofuels sector and increased demand from Asia, according to Robert Barrington, director at F&C's GSI team.

Large food producers are starting to see value in contracting directly with farmers not only as a way of securing supply but also to improve its quality. "Food producers have a fairly significant exposure to basic commodities with up to 30% of sales being based on commodity prices," he explained. "Big companies such as Nestle source no more than 10 to 15% of products such as sugar, coffee or cocoa direct from the farmers but there is a trend towardsncreasing this proportion."

Nestle has a programme in countries such as Thailand to develop direct relations with farmers to become their sole purchasers. They also provide them with technology and up-to-date agricultural techniques to improve the quality and yield of their produce," he said. Similarly Danone, has long standing direct relations with French farmers to protect and secure its dairy supply. "As food producers build closer relations with suppliers this should reduce their exposure to fluctuations in global commodity markets."

In the UK, this summer's floods have resulted in higher prices for basic goods such as fruit and vegetables, whilst the recent foot and mouth outbreak could also see meat, dairy and protein prices going up. "Foot and mouth is a local issue but I don't think we are going to see the same effect as we saw during the previous outbreak because its is more controlled this time round and we also have the benefit of prior experience of dealing with the epidemic. The current outbreak is unlikely to have a major effect on large food producers unless it spreads more widely."

Food companies need to develop a clear strategy for how they will deal with the food vs. fuel debate in relation to biofuels so that they are better positioned to predict and respond to competition that leads to price inflation in the commodities on which their businesses rely.