With most major commodities plummeting in price, how quickly will store inflation fall? And which categories will benefit first?


After a hot and bountiful summer in the UK and abroad, commodity costs are tumbling and food retail inflation looks set to follow suit.

It’s a far cry from 2012, when grain prices were rocketing after one of the worst droughts in living memory in the US and one of the wettest summers on record in the UK. With the harvest now nearly in on both sides of the Atlantic, US maize prices have fallen 40% from their peak at the end of 2012 to under £120/tonne and UK wheat prices are down a third to less than £160/tonne [Mintec]. But how widespread are the falls? Are they sustainable? And when are they likely to feed into lower retail price inflation?

Grain prices are down across the board. As well as corn and wheat, barley prices have slipped 30% since November to £140/tonne and oat prices have fallen 30% in just three months to £120/tonne [Mintec]. Sugar prices are also down substantially.

Although EU restrictions on sugar imports prevent the UK from profiting from the global price collapse, suppliers report a reduction of about 10% to 15% in the prices they will pay.

The expert view on inflation

  • Clive Black, Shore Capital: “The northern hemisphere harvest looks reasonably fulsome so our expectation is for food inflation to remain in the system but at 1-3% rather than the 2-4% we previously predicted, and much lower than levels witnessed over the last few years.”
  • Martin Deboo, Investec: “Wheat is down year on year, corn is well down and sugar is also coming down fast. With energy prices flat, every indication we have is that food inflation will fall.”
  • Kona Haque, Macquarie: “We’d expect to see prices come down as the new harvest hits the market. The world will be awash with supplies. It demonstrates that farmers can and do respond to high prices so long as the weather permits. The supply side hasn’t looked this good for years.”
  • Ashley Clarkson, Grant Thornton: “Globally there have been no disasters. Plantings were increased and crops have been good - putting downward pressure on global prices.”

The weather outside Europe and the US has also been good - depressing prices of other key commodities. For example, Arabica coffee prices have fallen 40% over the past year and palm oil prices have slipped over 20%. Indeed, it is increasingly hard to find a commodity that’s rising in price.

”Unilever play in many categories and are as relevant a barometer as there is. And for them we think only olive oil, dairy and tea are inflating - everything else is falling,” says Investec analyst Martin Deboo.

With the grain harvest still being processed, the likelihood is that commodity prices have even further to fall. “We’d expect to see prices come down as the new harvest hits the market. The world will be awash with supplies,” says Macquarie analyst Kona Haque.

Retail impact already visible
It typically takes at least six months for a change in a commodity spot price to affect retail prices. However, given commodity deflation started six months ago, the impact on the prices suppliers charge retailers is already visible. For example, in its first-half results in August, Nestlé reported pricing growth of just 0.8% - the lowest for a decade. Still, it is likely to take several months for the full impact of the commodity price changes to be felt on shelves.

Fruit & veg is likely to move first. Wholesale prices of carrots, tomatoes and potatoes are all down sharply thanks to better weather, and the impact is starting to show at retailer level. Prices of fruit & veg have fallen for four months in a row on a month-on-month and year-on-year basis, according to the Grocer Price Index (GPI) - although it’s still running at 3.9%, suggesting that it’s taking a while for inflation to flush out of the system following the long, cold winter.

The winter also hampered plantings of wheat. Bakers, fearful of another bad crop, made sure they were well covered on the futures markets - thus preventing them from being able to reduce prices quickly.

“The volumes being traded are still relatively weak. I suspect it’ll take a few months for retail prices to change,” says Grant Thornton associate director Ashley Clarkson.

As for eggs and poultry - prices of which are heavily influenced by grain costs - the full impact is likely to come through towards the end of the year and early in 2014 as contracts unwind.

Beef and pork prices are expected to remain inflated because of low livestock numbers in the UK but lower grain prices will at least take the edge off inflation. With the impact of the long winter still affecting retail prices, meat, fish & poultry remains one of the most inflationary categories in the GPI, with retail prices up 7% year-on-year this month.

In other categories, however, the general pricing trend is downwards. Average inflation across the big four has fallen from 2.84% in June to 2.57% this month, according to the GPI, and analysts expect that to continue. In a note to investors last week, Shore Capital said it expected UK food inflation to fall to 1% to 3% over the next six to nine months - down from its prior estimate of 2% to 4%.

Fuel prices
As well as falling commodity prices, it pointed to “a relatively benign expectation for energy costs” as another factor holding back inflation. Oil and plastic prices are largely flat year on year - and as the likelihood of international intervention in Syria falls, prices will, if anything, drop in the short term.

Exchange rate movements are also putting downward pressure on inflation. Good news about the UK economy in recent weeks has strengthened the pound, making imports less expensive. Since the start of July, the pound has risen in value against the dollar - which a lot of key food commodities are bought in - by more than 5% to $1.57.

Lower retail food price inflation will be good news for consumers but it will also be good news for the whole industry, says Shore Capital analyst Clive Black. “If incomes go up and there is less inflationary pressure then the volume of product bought will also rise and that can only be good news for retailers down the line.”