Consumer may be the loser
THE tumbling Australian dollar could arrest a multi-year trend of food price deflation for select foods as local producers chase higher-value export markets and imported produce becomes less competitive.
Food industry consultant David McKinna believes the high dollar and intense competition between supermarkets Coles and Woolworths have been the key factors in cutting the prices consumers pay for food.
By Dr McKinna's calculations, the cost of a typical basket of groceries dropped 25 per cent between 2009 and 2014.
From its year high near US95¢ in July, the Aussie has plunged to about US78¢ and Australian exports, particularly meat and seafood, could attract higher prices if the goods are to stay in Australia.
"The reason this prevailing sweet spot for consumers and supermarkets is about to end is the confluence of a number of changed market conditions including a falling dollar, new free-trade agreements, a growing Asian middle class and tightening scrutiny from the ACCC (Australian Competition and Consumer Commission)," Dr McKinna argued in The Australian Financial Review last week.
"Together, these market shifts have the potential to send food prices in the opposite direction."
The drop in the currency is already pushing table grapes to the export market, leaving Australian consumers with a choice between paying higher prices or being left with inferior produce.
FTAs, currency driving increases
Owner and chief executive of The Grape House, Charlie Costa, said the currency fluctuations are responsible for large increases in both sales and margins, particularly as 40 per cent of their product is shipped across the Tasman to New Zealand.
"We've had a 15 per cent increase in prices and 30 per cent increase in sales volume, particularly into New Zealand," he said
Australian table grapes are a $250 million industry and in the past two years it has overtaken citrus fruit to become the biggest Australian fresh fruit exporter by value.
The Grape House, owned by brothers Charlie and Paul Costa, has grown from 500 producing acres to 1500 in the past 10 years. It exports some 2 million nine-kilogram boxes of grapes a year, three-quarters of which they grow and the further quarter bought from local growers.
The firm, based in Euston on the NSW border and about an hour from Mildura, employs 60 full-time staff and, thanks in part to the falling dollar, expects sales of about $30 million this year.
"We've taken it from 73,000 boxes three years ago to just under 600,000," Mr Costa said. "We've taken the business in New Zealand off Chile and Peru and we are only five to seven days away on sea."
In contrast, South American grapes take 30 to 35 days to reach New Zealand.
"I think with the dollar dropping, it's just going to increase our exports," he said.
Also crucial are the effects of free trade agreements.
"They are very important. With the tariffs coming down in Korea and Japan, it's going to get even better," Mr Costa said, as The Grape House prepares to send it first ever shipment to Japan in the next few weeks.
However, Australians are being left with a sour taste in their mouths.
Australian Table Grape Association chairman Richard Lomman said high yields in the early regions have failed to develop into a sought-after fruit option for consumers. "This has led to slow sales causing a chronic oversupply and heavy discounting," he said
"Southern growers are gearing up to send their premium lines to overseas markets where quality is appreciated in the price paid," ATGA chief executive Geoff Scott said. "The export country is getting a better grape experience than the Australian consumer."
Falls in commodity prices
The success of the grape industry across the Tasman comes after the Financial Review revealed Kiwis were eating Australian lamb for Christmas dinner at almost half the price of locally sourced product.
While the currency devaluation played a part in the lamb story, drought in Australia and an oversupply of Australian livestock were more significant factors.
Across the broad suite of grocery prices, analysts are actually tipping food inflation to head lower. Late last year, Citi analyst Craig Woolford published a report anticipating food inflation to head towards zero by the middle of 2015.
Mr Woolford thinks prices are heading lower primarily due to big falls in key commodity prices used in food manufacture such as wheat and dairy, and lower input costs elsewhere in the supply chain, particularly oil used in transport.
Deutsche Bank analyst Michael Simotas points out the latest ABS data show food CPI is already moderating.
However, the prices of meat and seafood, both of which are significant export industries for Australia, could be on the way up, given the currency movements.
Food prices are notoriously volatile and are influenced by a range of factors but Bank of America Merrill Lynch economist Saul Eslake said the currency could contribute to food price inflation.
In 2014, fruit prices rose 7.3 per cent, while meat and seafood were up 4.9 per cent.
"There might be a currency component ... It depends how big exports are as a potential source of sales and how easy it is to ship," Mr Eslake said.
"In the case of meat, for example, a large proportion is exported and it may be that more gets sent overseas and it becomes more expensive."
On the seafood side, Dr McKinna pointed to the $140-a-kilogram Southern Rock Lobster at Christmas time.
Most of the restricted catch went to China, where prices paid were higher than local fish merchants were prepared to match.
Price war kicks on
Incumbents Coles and Woolworths are, of course, committed to fighting tooth and nail to win the price war as Aldi continues its aggressive expansion into Australia.
A spokesperson for Coles said Coles' food and liquor deflation has averaged 0.8 per cent on an annualised basis since 2008, while overall food prices have grown at an annual average rate of 2.2 per cent and the overall CPI which has risen by 2.6 per cent annually over the same period.
"Compared to 2009, an average Australian household can save $570 this year by shopping at Coles and we are committed to lowering prices even further for our customers," the spokesperson said.
A spokesperson for Aldi said as a discount retailer, it would not be beaten on price.
Price war aside, there is a good chance meat prices will rise, unless the supermarkets wear the pain in terms of lower margins.
Beef prices have surged as recent rains ease the pressure on some farmers who had been dumping stock.
The Eastern Young Cattle Indicator, a measure of east coast prices based on recent sales from 26 eastern saleyards, has soared from around $3.40 a kilogram in November to a record $4.5025.
Meat and Livestock Australia analyst Ben Thomas said the key drivers behind the surge in prices are the weaker Australian dollar and strong import demand from the United States.
"Australia exports around 70 per cent of its beef and the Aussie dollar is now around that US80¢ mark.
"The second key thing is the US, which is the world's largest beef producer and consumer is currently at a low point in its production," he said.
"Cattle prices are also very dependent on rain. Virtually all of 2014 and 2013 was drought conditions over our key cattle regions but in the last two months we've had rain.
"It's been a cracker start to the year."
Woolworths tends to buy its beef direct from farmers on long-term contracts, whereas as Coles is, relatively speaking, more exposed to saleyard prices.
Product lines marketed under special price campaigns cannot be lifted for time without incurring the wrath of the ACCC.
It is also difficult to know the flow-through impact of higher beef prices on the retail shelf without seeing the contract terms between retailers and suppliers.
However, with less need to dump stock and robust demand for beef globally, it does seem there will be upward pressure on long-term contracts as well as beef directly exposed to saleyards.
This potentially raises thorny questions for the under-fire Abbott government and its internal debate on whether to expand the GST to fresh food.
It could also have implications for consumer confidence and the economy.