Food prices set to rise - again

Prepare for more food price rises, particularly meat, pasta and vegetables. The combination of a severe US drought - corn prices have surged 60% since early summer - and a wash-out UK summer looks likely to work its way through the UK food chain, putting more strain on George Osborne's inflation battle.

How bad will it get?

Food price hikes

Much of the concern has been leveled at the US farm belt which has experienced its worst drought for 50 years or so. Sustained heatwaves have destroyed more than 40% of the corn crop; soya beans, vital for livestock feed, have also been badly hit. But there's also worry from the Russia and Ukraine.

Dipping yields from the Urals and Siberia have seen the Russians clip crop forecasts. It's not clear though whether Russia will bring in a grain export ban, like it did in 2010, pushing up the price of wheat.

Farm gate prices

Phil Bicknell, chief economist at the National Farmers Union, applied some caution to food price concern. "History tells us that when you see shifts in commodity prices there will be a time lag effect and that will filter through to the retail shelf. It varies from product to product. Also, the raw material cost is just one component."

"The obvious one is how wheat prices will hit bread. The average farm gate price is typically just 9-10% of the final retail level. So even though we've seen a 20 to 30 pound a ton gain in wheat prices in recent weeks, that's relatively small when looking at the overall retail price level of a loaf."

Eat rice

There's one crop that, so far, has avoided trouble: rice. Thailand, for example, is building its biggest stock pile for the last 50 years. That is small relief for most British consumers though who have seen food prices rocket by nearly +30% since 2007 (ONS data) while annual pay levels have struggled to increase beyond 10% in the same period.

Investment bank Morgan Stanley claims higher housing costs, fuel, energy and food prices will likely see the average UK household £200 a year worse off in 2013 - a combined fall in income of £1.3bn. And this gap will likely widen to £5bn by 2015, the banks predicts.

Last week the UK's second biggest energy supplier, SSE, penciled in a +9% gas and electricity price hike from October, close to three times the rate of inflation. Rail fares are due to climb +6.2% from January.
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