The real price of cheap food

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand there is a price to pay.

 

The combined effect of the recession, the growth in online retailing and the increased market share of discounters such as LIDL and ALDI has shaken the likes of Tesco, Sainsbury and Morrison’s. For supermarkets focussing on market share food prices must be kept down, at all costs.

 

But in the case of farming it is such a long cycle and there is little account taken of retrospective costs for the producer.

 

The latest casualty is the UK dairy industry. Global milk prices have fallen 50% in the past year to an 8 year low. The NFU said in December that the number of UK dairy farmers had dipped below 10,000 for the first time - a 50% fall since 2001.This reflects the worsening conditions for producers some of whom are currently faced with accepting a price of 22 pence per litre of milk versus a production cost of 28 pence.

Looking back 25 years ago, British people spent about 22% of their disposable income on food .In 2015 the spend is roughly between 4 and 8%, so food has actually become cheaper.

 

The reality is that the 'bog-offs' - the buy-one-get-one-free deals are not actually sponsored by supermarkets. They are paid for by the producer who has to agree to them under tight terms and conditions. It has recently been reported that LIDL has introduced payment terms of 120 days for its UK suppliers.

 

With margins of the big supermarkets falling from 5% to nearer 3% producers will be expected to absorb more of the pain.