Dinner Party Conversations: What’s the beef with inflation?

Chris Forrest – Senior Partner and Principal Adviser Sovereign Wealth Partners

You may have noticed over the past few years a steady increase in the price of your basket of groceries and the rising cost of catering for a dinner party (or you will at your first dinner party after two years of lockdowns).

It’s not your imagination and if, like me, you have a household with teenagers, you’ll be feeling the price pain!

So what’s been going on?

It depends on what food product you’re talking about. Weather clearly has an impact on nearly all raw ingredients, but the past few years have been very good for farmers. So why are prices going up? And when will they come down?

Well, it depends on what you’re talking about.

Meat

Taking a look at the price of beef, priced on carcass weight, we can see the price has increased by around a whopping 140% since January 2020. Coupled with processing, distribution and retail oncosts, the retail price has risen exponentially.

Source: Dept. of Agriculture Water and Environment

Why is this?

It can be a bit confusing depending on what you read and what message is being pushed. At face value it’s the weather. After years of drought many farmers destocked and now, in the good times, they are holding back cattle from the sale yard to rebuild herds. Coupled with high overseas demand and food venues reopening as lockdown conditions are eased and prices are expected to remain well supported for quite some time.

What does this mean?

Interestingly, whilst other meats haven’t experienced the same price action, they too may be supported as consumers make changes to their purchasing habits. So far, lamb prices have risen to an extent whilst poultry and pork prices have remained pretty stable year on year but this may well change. Predictions are difficult to make as Australian diets also change with the rise of ready-made meals, vegetable-based meat replacements and flexitarians (which science calls omnivores, but let’s run with the trendy word) seeking to reduce red meat intake.

Will prices ease?

Prices are driven by a number of factors. Looking at recent outlook reports from the Meat and Livestock Association (MLA), the national cattle herd is predicted to grow by 1.1 million (to around 27.2 million) and slaughter numbers to grow by 11%. This increase in supply may only just meet demand indicating high prices will be supported. The MLA also expects export markets to grow, creating further pressure on demand.

That said, this may drive domestic consumers to change their purchasing habits. Whilst the MLA is forecasting steady levels of consumption, the long-term trend is lower beef consumption per capita. Eventually, prices may have to come down to meet demand and, with the logistical headwinds created by the pandemic and the time it takes to mature a herd, it may not be until 2023 that prices moderate.

The story is a little different for sheep. Much of this has to do with the ability to grow sheep flocks more quickly. The national flock is expected to grow to 74.4 million head in 2022 with an influx of lamb in early to mid-2022. The MLA expects lamb production will reach an all-time high in 2023 given favourable conditions. Historically favourable prices may ease sooner than beef.

Grains

Animals also need to be fed and as fertiliser prices have risen, so too has the cost of growing the feed despite favourable growing conditions. Both Diammonium Phosphate (DAP) and Urea have risen some 150% since mid 2020 which has obviously impacted the cost of growing feed but also for that which we consume.

It’s not just the price of meat. Other agricultural commodities which are consumed as raw products and inputs into other refined goods have also been going up.

Considering grain prices, wheat, canola and barley prices are up over the last two years anything from 15% to 40% depending on the crop and seasonality.

The recent invasion of Ukraine by Russia is expected to have an impact on grain prices. Ukraine is one of the world’s biggest exporters of wheat, barley and corn. Shipments from the Black Sea are expected to be disrupted. Not to mention the rising energy prices triggered by the invasion which adds to the cost of the production chain.

Dairy

You may remember the $1 per litre milk once offered by Woolies and Coles. It was quite controversial, but little wonder it has long gone. According to Australian Dairy Products Federation, the price of milk at the farmgate has risen by around 10% since 2019/20 (NSW farmgate price is currently around 61 cents per litre).

Fruit and Veg

Lastly, horticultural prices have not been immune. Whilst prices are affected every year by seasonality, the general theme is, they are up even when in season. Rising watermelon prices have been felt in this household as they are voraciously consumed by the younger household members.

The good news?

For the younger generation out there saving for their first home, good news on the smashed avo front! Prices are down thanks to a number of highly productive seasons and more trees.

Source: Dept. of Agriculture Water and Environment

When will prices come down?

It’s all about supply and demand. Where there is excessive demand, there will be inflation until there is a supply side response. If cattle herds are being built up, then expect more beef on the market in coming seasons. If there is a bumper crop and supply exceeds demand, this will eventually flow through to prices. Eventually. Producers will naturally want to earn as much as they can and, in the perfect economic model, they will seek to balance volume and price as best they can, subject to the vagaries of farming. You can, however, expect a lag in timing between the supply side response and any moderation in prices.

How can I invest in food?

If this is an area in which you want to invest, there are a number of avenues.

This is not a recommendation, and you should speak with your adviser prior to making any investment decision. You might get exposure to food directly or indirectly through stocks related to farm equipment, fertilisers, supply and distribution. You might access an exchange traded fund such offered by BetaShares (ASX: FOOD), iShares Global Consumer Staples ETF (ASX: IXI) or perhaps through some wholesale private equity investment.

There are a number of sources of information but if you’re keen for a single consolidated outlook, you can read more in this Quarterly Report on the Agricultural forecast and outlook produced by the Australian Government Department of Agriculture, Water and Environment or head to the Meat and Livestock Australia which has a plethora of resources.

Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Sovereign Capital Pty Ltd ABN 44 164 127 833, AFSL 456235.

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