Sunday Essay - food prices and Australian primary production

The release of OECD data showing that food prices in Australia have increased 41.3 per cent since the start of 2000, the fastest rate of increase of any major developed nation, created quite a stir in this country.  

Spain had the next fastest rate of increase over that time, at 41.2 per cent, followed by the UK at 32.9 per cent. Canadians are paying 32.7 per cent more, Italians 29.7 per cent and Americans 28.4 per cent.

I haven't been able to find the original source data, so cannot comment on the detail. However, the story did trigger some thoughts.

The Australian commentary has focused especially on the big supermarket duopoly, suggesting that this leads to higher prices. I think that there is some truth in this, although the duopoly has arguably affected quality and variety more than price. However, there is more to it than this.

Historically, food in Australia has been cheap and plentiful. However, a number of of things have combined to place this under a degree of threat, at least so far as cheap is concerned.

On the supply side, the home gardens that used to provide many families with vegetables and fruit have been in decline for many years. This means that families are more exposed to retail prices.

The market gardens and small farms that used to ring major urban centres have diminished since land is worth more for housing than agriculture. While this has now triggered a back-lash, in Sydney there is heated debate over the need to preserve agricultural land, the net effect is reduced choice, less competition.

Outside the major urban centres, the water that fed expanding primary production has been reduced through a combination of drought and reduced water allocations associated with other demands including urban water and environmental needs. The effect is reduced supply.

The whole rural sector itself has been struggling as a consequence of higher input costs, increased regulation, diminished rural services, reduction in Government support of all types. Our farmers are getting older, with fewer people wanting to enter agriculture. They also struggle to attract the labour they need. This is biting home now, although the full impacts are still a decade or so away.

The effects of change vary across sectors.

Australia used to ride on the sheep's back. The wool industry, the romance of wool, is now largely forgotten in a citified nation. Slowly, insidiously, the city consumer pays more and more for lamb as sheep numbers continue to decline. At first, the most recent effects were concealed because drought induced sales kept prices down. More recently, prices have increased sharply, far beyond the average overall increase in prices.

To put a number on this, the cost of an equivalent leg of lamb has increased over the last few years from around $A11 to $A21. A lamb leg is now a special treat.

This family used to eat cutlets, the most expensive cut, once a week. At $A2 for a small cutlet we simply cannot afford to. You need two to three cutlets per person. Two cutlets per person in a four person family equals $A16. Then you have to add the other food costs to this.

Four years ago I could feed this household and well for around $A10 average ($A2.50 per person) for a meal. I cannot do so now.

On the demand side, we live in a globalised world. I have no problems with this. However, we have to accept that it has an impact on Australian food prices.

When global demand goes up, Australian food prices rise. No worries. The real problem lies in periods when food prices go down. This may sound counter intuitive, so let me explain.

There have always been gluts and famines. During glut periods, overseas food flows into Australia. Pork prices, for example fall. We as consumers benefit. Then production falls and prices rise. Herein lies the rub.

Staying with pork, Australian pork production cannot simply be turned on and off. When in times of international glut we buy cheap supermarket home brands sourced from overseas, Australian pig producers go out of production. Prices then rise as the glut ends. However, the remaining Australian pig producers cannot simply increase supply. This takes time directly linked to the breeding cycle. It may be several years before supply recovers, and during that time prices remain high.

In purely domestic terms, supply may in fact never recover, leading to an increased reliance on imports.

I am a strong supporter of free trade. I am not a supporter of the blind application of market principles, of the blind application of theoretical constructs, in the absence of analysis of the on-ground facts.

Just at present, there is a bitter dispute in Tasmania over the prices to be paid for milk by the now small number - two - of dairy companies that have replaced the old cooperatives. These two front off with the supermarket duopolists.

The arguments in the case are quite complicated. However, the key point is that Tasmanian diary farmers appear to be in the position that the offered price is below their costs of production. If this in fact the case, then they are in fact being told to go out of production. Once this happens, it will take several years for production to begin to recover.

I must emphasise that I am not making a judgement here. I said that the facts of the case were complicated. Rather, I am simply using the case to illustrate a broader point.

The decline in the importance of primary production in this country, together with the increasing disconnect of urban people from rural life, means that there is now remarkably little discussion in Australia on rural matters.

We can see this in the responses to the OECD report. The commentary all focused on two things, cost to consumers and the supermarket duopoly. There was very little discussion of underlying supply and demand issues, none linked back to changes in the Australian rural sector.

I think that's a pity.