Food costs to soar as farmers see margins fall

Food prices are set to soar 10 per cent this year, eroding the profit margins of farmers and processors.

Food prices are set to soar 10 per cent this year, eroding the profit margins of farmers and processors.

Food prices are set to soar 10 per cent this year, eroding the profit margins of farmers and processors, agribusiness investment banker David Williams says.

It comes as the world turns to Australia to deliver a “hat trick” in grain and oilseed production as Russia’s invasion of Ukraine curtails global supplies and drives up costs, according to a new report from Rabobank.

Mr Williams said many producers would need to secure price rises, with their profit margins not able to cover soaring input costs. He was speaking as a split has emerged across Australia’s agribusiness sector.

While companies like GrainCorp are benefiting from record wheat prices, it has had the opposite effect on businesses like poultry giant Inghams, which is a big buyer of grain and has limited capacity to pass on costs.

Mr Williams said significant inflation would spill into wage increases across the board.

“Unfortunately, this will be at a time when there are labour shortages across the board,” he said.

He called on the Albanese government to fast-track visa applications for farm workers and encourage airlines to transport more cargo.

“One-off significant increases in grain costs will drive food inflation and increase the cost of stock feed and therefore beef and other proteins. The effect of this will be that the unbelievable success of increasing incomes in developing countries will now be undermined by pushing people back into poverty and starvation for others,” Mr Williams said.

“Compounding all this I expect to see significant increases of up to 10 per cent in many food companies’ costs from Covid-related effects alone.

“Some companies are not even making a 10 per cent margin so second half profits for some will need to be boosted by price increases. Retailers and food service customers of the major food companies are unlikely to allow companies to fully adjust for cost increases so I predict a lagged catch-up in food prices.”

Mr Williams said he expected increased logistics prices to persist through this year, with shipping and airfreight not returning to normal before 2023.

It comes as Rabobank has forecast a third bumper winter crop, with plantings to hit a record 23.83 million hectares.

“This would be nearly 1 per cent up on last year’s record planting and 11 per cent above the five-year average,” Rabobank analysts say. “It includes a 1.4 per cent lift in wheat and a record canola planting, up 20.9 per cent on last year, albeit at the expense of barley, oats and pulses.

“In a year of global shortages and high commodity prices, the forecast record planting comes as global markets look to Australia to deliver a ‘hat trick of great grain and oilseed production’ at a time when poor production and export constraints in a number of countries are prompting the United Nations to warn that the world is on the brink of a food crisis.”

The report’s co-author, RaboResearch analyst Dennis Voznesenski, said while the outlook was for another bumper harvest, it was too early in the season to tell if the planting would deliver another record in production.

“At this point, until the crop is more progressed and we can see if there are any surprises in store, we have been conservative in our production volume estimates. In particular we’re mindful of the slow planting progress in NSW and the corresponding decline in yield potential with late planting, as well as overly wet growing conditions,” he said.

Winter plantings are forecast to surge 10 per cent in Victoria and 8 per cent in Queensland compared with 2021. NSW and South Australia are expected to see small contractions in planted area – of 2 per cent, 1 per cent and 1 per cent respectively.

But report co-author, RaboResearch senior commodities analyst Cheryl Kalisch Gordon, said Australia was “well placed to help support global wheat needs in 2022/23”.

“Excess carry-over from 2021/22, together with another above-average harvest and strong global demand, means we expect Australia could export around 26 million tonnes of wheat again in 2022/23, almost 50 per cent above the 10-year average and more than 50 per cent above the five-year average,” she said.

GrainCorp, the shares of which have almost doubled to $9.84 in the past year, is now investing across its terminals ahead of the 2022-23 harvest to “efficiently manage” high volumes from growers.

While pandemic isolation rules have created chaos across Australia’s food supply chains, putting pressure on inflation, GrainCorp chief executive Robert Spurway said last month the company has so far “shown incredible resilience”.

“We‘ve exported four and a half million tons of grain in the half year, that sees us well on track to deliver between the eight and a half and nine and a half we’re forecasting for the full year,” he said. “We‘ve overcome the sorts of challenges that many participants in global supply chains have seen. And some of that is the fact that we’re predominantly a bulk exporter, relying on vessels that we charter and manage.”