Raw material price drop, yet no lower price in supermarkets

Last year, consumers paid substantially more for food products. Although world market prices of cereals and dairy products, among others, have been easing or even falling for some time, supermarket prices continue to rise unabated.

Dairy and meat more expensive

The prices of animal products such as meat and dairy are rising sharply. This is because high cereal prices have made animal feed much more expensive and a major cost item for livestock farmers. Supply and demand are also out of balance with these products. For instance, the price of milk increased not only because of higher feed costs, but also because demand increased while milk supply lagged behind. As a result of the lifting of corona restrictions, demand for dairy increased again. At the same time, many dairy farmers in several countries struggled with extreme drought. Poultry meat and eggs also rose sharply in price due to an imbalance in supply and demand. A good part of this price rise can be traced back to bird flu.

Commodity prices fall again

Prices for energy and cereals have now passed their peak. In fact, the price paid on the commodity market for vegetable oils is already much lower. Meanwhile, the supply of milk is rising again, while demand for dairy products is actually declining due to lower purchasing power. In many countries important for dairy product sales, consumers have less to spend due to high inflation. Although the price farmers receive for their milk is still higher, factory prices of many dairy products such as butter, cheese and milk powder are lower.

Lower raw material prices do not yet lead to lower supermarket prices

So while raw material prices are rising less sharply or even falling, consumer prices are actually rising more sharply. This is because price increases and decreases have a delayed effect on the chain. All things being equal, a drop in raw material and energy prices in 2023 could lead to lower prices in the supermarket. However, there are still too many uncertainties surrounding grain, energy and packaging prices. Moreover, labour costs are increasing, climate change is causing more extreme weather conditions and more volatile harvests, and bird flu is still expected to rage in several European countries in 2023. Furthermore, sustainability and policies to reduce nitrogen create many uncertainties, production constraints and higher costs for farmers.

In addition, the process of negotiation between supermarkets and suppliers is important. A number of producers had to make significant cuts in profit margins during the sharp price increases of raw materials earlier this year. To regain margins and be able to invest in, for instance, sustainability, some of these companies are unable to lower their prices despite the decreased costs.

Consumers pay much more attention to price

Supermarkets, on the other hand, will try to keep prices as low as possible to remain competitive. At the same time, supermarkets will want to maintain their profit margin, which means that they will not cut all prices without further ado. Only when purchasing costs fall substantially and supermarkets experience fierce competition, a structural decrease in shop prices is on the horizon.

A price increase of almost 16 per cent for food products is very exceptional. For 2023, the cost of various raw materials will be lower than during the peak in 2022, but will remain at a high level. Prices are expected to rise in the first few months of 2023. After that, they are expected to stagnate or even fall slightly.

Abnamro.nl