The emerging food barons – what’s up with the soaring prices in SA and the UK?
Food inflation remains on a worrying upward trajectory, with SA and UK food inflation running at about double the rate of their headline inflation rates. That’s completely at odds with the steady decline in global food prices since March last year. We look into what could be contributing to this fundamental disconnect.
Houston, we have a problem. This week’s inflation data highlighted a glaring disconnect in the global food price chain, with the prices we are paying at grocery stores still on the rise while global food prices have been declining steadily since March last year. So, what’s up?
In South Africa, food price inflation reached a 15-year high of 14.4% in March, more than double the headline inflation rate of 7.1%. Meanwhile, the UK is facing its steepest increases in food prices since 1977, with UK food inflation closing in on 20% in March compared with its double-digit headline rate of 10.1%.
Food price inflation in Germany has been tracking at 22.3% this year, while in the US, the food inflation rate is a far lower 8.5%, but still running ahead of its 5% overall inflation rate.
In stark contrast, global food prices, as measured by the United Nation’s Food and Agriculture Organisation (FAO) Food Price Index, paint a completely different picture, having fallen more than 20% since March last year after shedding another 2.1% between February and March.
A range of reasons has been put forward to explain this economic anomaly, many of which put it down to regionally specific challenges. But at a global level, recent research has shown that there could be a much bigger structural problem at play that could prove far more intractable and economically damaging down the line.
In South Africa, the depreciating rand and rolling blackouts are seen as key contributors to the ongoing increase in food prices because of the impact these have on the cost bases of the producers and retailers in the food chain. In the UK, Brexit has been identified as a key contributor to its rising food inflation.
Another explanation put forward is that there is always a lag between when commodity price changes feed through and the retail food prices. In a recent report on the state of groceries in Europe, McKinsey said its historic data suggest that food retail prices adjust to changes in the underlying commodity prices after six to 12 months. It thus expects food inflation to “slow down significantly” in the second half of 2023.
The food barons
However, in the wake of the pandemic, various organisations have pointed to there being more afoot in the food pricing chain that could subvert the price-setting process. They point to the so-called food barons, a handful of global companies that dominate the agrifood sector, and how their actions contributed to food price inflation during and after the pandemic.
In its report Profiting from Pain, Oxfam says billionaires in the food, pharma, energy and tech sectors cashed in on the pandemic, profiting at the expense of the millions of people facing a cost-of-living crisis. It says inequality, already extreme before Covid-19, reached new levels, and it urges governments to “implement highly progressive taxation measures that in turn must be used to invest in powerful and proven measures to reduce inequalities”.
Research done by the ETC Group in 2022 found that the dominance of a handful of global companies was a significant contributor to pricing pressures in the agrifood sector during Covid. It calls these firms the “food barons” and says the extent of their control of the food chain enables them to “wield enormous influence over markets, agricultural research and policy-development, which undermines food sovereignty”.
The group also points to the likelihood that these food barons profited unduly, resulting in “greedflation”, during the pandemic. It acknowledges that it’s difficult to discern whether food price increases in a crisis are “genuinely crisis-related or rank profiteering and corporate greed”.
However, it believes the Covid-19 pandemic “brutally unmasked the extreme vulnerability of a highly centralised, industrialised food system that exploits workers and relies on ‘just-in-time’ global supply chains that are non-transparent and susceptible to disruption and corruption”.
ETC Group’s research shows that just four to six firms control many parts of the industrial food chain after decades of consolidation in the food and agricultural industry.
It notes: “Economists typically consider a four-firm concentration ratio of 40% or higher reflective of a sector that operates as an oligopoly. Many of the sectors we monitor are already above that 40% threshold; others are on the verge of passing it.”
Power shifts in the sector are set to intensify further with the emergence of food barons in China, Brazil, India and east Asia, regions in which the food and agricultural industries were traditionally dominated by North American and European corporations.
The report references the consolidation taking place in China: “The pace and scale of China’s hyper-industrialising agrifood system is without precedent. Chinese Food Barons are catering to colossal domestic as well as global markets: China’s state-owned Syngenta Group is now the world’s largest agrochemical input firm (seeds, pesticides, fertilisers); and China’s newly consolidated Cofco is second only to Cargill as the world’s largest agriculture commodity trader.”
Even if the food barons’ contribution to the high food inflation rates we’re currently experiencing is not as significant as feared, this report highlights that pricing behaviour during the pandemic may take a lot longer to unwind, if ever, than economists are factoring into their current forecasts.
It also suggests that average food price inflation could remain higher for far longer than would have been the case if the agrifood industry was more competitive and price-setting along the food chain was more transparent.
With that in mind, the extent of food inflation still in the system is a real worry and could put paid to hopes that central banks are on track to win the battle of bringing inflation rates back down into pre-Covid target ranges in the near future. DM/BM