Trickle-down effect of lower oil prices to reach food costs

Trickle-down effect of lower oil prices to reach food costs

Rabobank says recent oil price drops will likely bring food prices lower, but won't affect consumption levels greatly

The price declines of both oil and agri commodities will contribute to lower costs for food production, eventually leading to lower consumer food prices, Rabobank said in a new report issued Wednesday.

According to the bank, oil prices are likely to stay low throughout 2015 leading some sectors and regions to benefit from lower costs for longer, depending on the competitive settings.

For the global food and agriculture industry itself, oil is not a major cost factor and lower prices will provide a limited upside to margins, the bank expects. While oil does add costs at every step, from farm machinery to distribution to packaging, natural gas is a more important energy cost, the bank said.

Rabobank says recent oil price drops will likely bring food prices lower, but won't affect consumption levels greatly

Where oil and gas prices are linked, industries with high gas consumption, such as horticulture, milk powder, coffee, potato processing and beer production, costs are likely to be lowered and margins improved, at least initially, Rabobank said.

Some of the upside will eventually be passed downstream in the value chain, initially to processors, then to retailers and finally—driven by competition—to the consumer.

Related: Food Prices Rise After Flattening in Fall

For the sector overall, an expanded transportation radius, particularly for fresh products, will create the biggest change. The most affected sectors from a cost or competition perspective are likely to be wild catch seafood, biofuels and horticulture, Rabobank expects.

Food is relatively inelastic, so lower food prices will drive up volumes mostly for upmarket food and drink and in developing regions, where food is a bigger part of household spending.

From a demand perspective, Rabobank expects the biggest volume increase to be through upmarket food and beverage consumption such as foodservices, wine and spirits, beef and pork, exotic fruits and fruit juices.

Source: Rabobank

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