Food Prices are only part of the story

The cost of food is rising worldwide and food riots were a feature of the 3 F’s (Finance; Fuel and Food) in 2008, from Italy to the developing world. The benchmark food price index (FAO) rose 25 between December 2011 and February 2012 and there is rising concern that climate change could cause the price or food to double by 2030.

The impact of these price rises will not be uniform. Where developed world consumers spend 20 to 25% of their income on food; Central Africa spends 55%, North Africa 50% and Southern Africa 43%. In South Africa, the wealthiest were spending no more than 3% on their food bills and, in April 2012, with inflation for the most basic SA food basket at 8.7%, this equated to more than 20% inflation for the poorest 30% of the population. Food security issues can have a major impact on food affordability and, as Sen and others have demonstrated, it is prices and not shortages that cause famines. And that means the journey from field to fork is the key issue.

The route to market is paved with ... traffic jams

It is expensive to be poor across the board. Kerosene and other non-electirc sources of light used in developing countries are expensive and inefficient. A poor rural family in the developing world pays the equivalent of $100 per year of what a family in the developed world pays to receive only 0.2% of the light. And without access to banks, money lender rates and even micro finance can be exorbitant.

(See: http://www.lutw.org/Economic/Development/Poverty/Reduction).

The market price of food is not the full story. We need to understand the end-to-end costs from field to fork. In other words, it is the supply chain as a whole that needs to be looked at. Here’s a fuller picture:

  • Location.The French Historian Braudel was fond of saying that history was what people make of their geography and, that various countries tend to specialise in specific products is not a discovery of cluster theory. For centuries, towns and regions have been associated with specific produce. For example, the Silk Road was established for one end to trade with the other exchanging what they did best – silks and spices from the east and so on.A key issue is that some locations have the opportunity to supply global markets and others are more focussed domestically or even on a local subsistence economy. The key issue is that this is more to do with livelihoods than lifestyles – in fact, many studies describe some countries as suppliers and others as consumers. All too often, entering global markets carries significant risks – especially when your location is just a stopover for footloose Corporations in their relentless race to the bottom price.
  • Farmers input costs.Fertilisers, fuel and electricity are increasing dramatically; power outages plague business continuity and embedded water (the water need to produce products – a staggeringly underestimated factor covered elsewhere on the TL Blog). These factors are compounded by the fact that small farmers pay more for agricultural inputs and receive less for their outputs than large farms and firms do. It is expensive to be poor when you have no access to credit; pay higher interest from loan sharks; much higher tariffs for utilities and so on. And, if you live in remote rural areas logistics costs may well be prohibitive. 
  • International standards.The majority world is predominantly informal and, it is difficult for small farmers or micro firms to be part of global supply chains without strict adherence to exacting standards – many of them set by private Corporations rather than Governments.Standards on specification; quality; quantity; delivery and timelines are not designed to make life easy for the suppliers and, as International Corporations control the supply chain, these players pick and choose who will supply them. Smallholders have little or no chance.Take Kenya. In the late 1950s small holders were the key to the growth of the horticultural trade, comprising 70% of production capacity with cooperatives used as a means to invest in common machinery and market. By the late 1990s smallholders generated only 18% and the top seven exporters controlled over 75% of exports (Dolan & Humphrey). Thomas Lines (Making Poverty, 2008) highlights other examples. Thailand’s leading supermarket chain reduced its vegetable suppliers from 250 to just 10. And in Brazil more than 75,000 dairy farmers were de-listed by the 12 largest milk processors between 1997 and 2001. The point is that this concentration of trade is all about the big players having a preference for bigger suppliers to police the standards that are required.
  • Cost of business. Then, as they master the shift in emphasis, absorb new ideas like branding and shelf ready packaging other costs come into play between the farm gate and the retail price to the consumer. In South Africa, Professor Andre Jooste of the NAMC, has observed that between March 2005 and March 2012, prices of plastic bottles has increased by 82.2%; of tinplate by 84.8%; kraft paper by 34.3%; corrugated card board boxes by 35.7%; gas and water by 96.3%; electricity by 177.4% and petroleum and coal by 121.9%. In 2009/10 the total estimated consumption cost for primary South African agriculture alone was R1.84 billion ($225 million). For 2011/12, this figure could be as high as R3.77 billion ($463.71 million).
  • Retail margins. Professor Jooste studied a small Southern Cape Retailer between 2001 and 2011. Water and electricity have increased by 600%; banking costs by 500%; pest control by more than 200%; and salaries by 100%. In 2001/2 the gross margin was 21% with a net margin of about 12%. By 2010/11 this had fallen to 18% gross and 6% net.
  • Logistics.  The Economist (2002) told the tale of carrying 1600 crates of Guinness across Cameroon. It should have taken 20 hours. It took four days with 47 road blocks along the way. A recent report tells of a 1700 kms trip between Mombasa in Kenya to Kigali in Rwanda on a route known as the Northern Corridor. The driver will be on the road for at least 13 hours a day moving at an average speed of 53 kms per hour. There are two border crossings and, another 45 road blocks costing an average per trip of $158 in bribes – not to mention the frequent detours caused by road repairs and construction and even more waiting for accidents to be cleared.  And then, there are the running costs.

Max Braun Consulting Services found that in South Africa from 2004 to 2011 the running costs for a seven axle vehicle increased by 168.7%; for a six axle vehicle, 126.5% and for a two axle vehicle by 120.6%. That’s road transport but, for several non-traditional commodities like cut flowers local players have to factor in sophisticated cold chains and, this may mean air cargo – which in turn carries risks. For example, who would have factored in the devastation caused to the Kenyan cut flower industry by an Icelandic volcano which grounded planes throughout Europe and closed down the Kenyan horticultural industry inside 48 hours at a loss of millions. Globalisation means stretched supply chains and often these can break.

There is one other consideration that pulls all of the above together and sets a challenging agenda. For generations, Africa has been the place where raw materials were sourced for value to be added elsewhere. Suddenly, there is more cargo moving between African countries than ever before. It is one thing to move things to ports and away; quite another to move things around a continent that has too many roads that dissolve in the monsoon; too many informal barriers that delay vital movements; the litany of tough conditions goes on. And this will be compounded by increased internal traffic. All that has been said now has to be done – and done quickly.

Commodity price fluctuations can have the devastating effect that oil prices have had on the Russian economy – when high, all is well; when low, the lack of a diversified industrial base becomes evident. A rising tide raises all boats but a low tide lets you know who was swimming with no clothes on. This is where the costs of that route to market kick in.

We need to look beyond the price of commodities and deeper into the end-to-end costs of preparing; producing; packaging; delivering and disposing of the products that make the world go round. Supply chains not companies compete these days and, it is the route to market that dictates the price not just the product itself.

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2 Responses to Food Prices are only part of the story

  1. Niamh Allan says:

    Increase in the prices of food resources will impact every business. It will affect the whole global supply chain. Supply of essential crops will have serious consequence that aid agencies to feed millions of people.

  2. Hugh Marcy says:

    From a food perspective and feeding families, certainly an argument for growing staples locally! Shipping water laden vegetables across timelines seems absolutely idiotic.

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