End of the ‘supercycle’?

THIS ARTICLE appeared in Reynolds’ in-house magazine The Marketplace. Cast your mind back fourteen years to the year 2000. Politicians were getting grief about excessive spending on the Millennium Dome, and IT managers everywhere were finally able to relax having realised that the Millennium Bug hadn’t rendered all computers useless as the clock struck midnight on December 31.

Foodservice Footprint Graph-1-World-food-prices-300x203 End of the ‘supercycle’? Features Features  The Marketplace Reynolds European Food and Farming Partnerships EFFP










It all seems fairly unremarkable now, doesn’t it? Yet 2000 was a turning point in more than one way, and in particular it marked a change in market dynamics for the agriculture and food sectors, which continues to influence us today.


If we look back to the twentieth century, and particularly the post-war years, agricultural commodity prices had consistently fallen in real terms as increases in productivity outstripped increases in demand. Yet in 2000 this trend started to reverse, with prices doubling since then (see graph 1 below).


The reasons for this reversal are widely understood – suddenly the increased demand for agricultural commodities, particularly from emerging markets, was growing faster than productivity. Basic economics tells us that when demand outstrips supply higher prices result, and volatile weather conditions have culminated in a number of high price peaks in recent years.


Economists have referred to this trend towards ever higher prices as a supercycle in food and agriculture – a trend with no end, if you like, because the underlying market conditions – that of a growing population, along with limited resources such as land, energy and water to allow increases in supply – are unlikely to abate.


But here’s the crunch – abate it has, with prices in most of the major agricultural commodities from wheat to dairy and from soya to cotton having fallen sharply in recent months. What is happening and is this the end of the so-called supercycle in agricultural commodities?


So, what are the wider economic factors that are impacting food prices?


If one looks to the UK economy then it seems that we are now in growth with an economic recovery that appears reasonably well founded. In its August 2014 inflation report, the Bank of England reported that “Robust, broadly based, growth over the past year has taken output to above its pre-crisis peak and unemployment has fallen sharply.” It added, “…spending should continue to be supported by reduced uncertainty and improved credit availability. Over time, a sustained revival in productivity and real household incomes is expected to underpin the expansion.”


In short, there is now a fair degree of confidence that the UK economy has returned to sustained growth, with the Bank of England going on to predict 3.5 per cent growth in 2014, combined with a sharp fall in unemployment to 6.5 per cent. There also seems to be good news when it comes to that other big economic factor – inflation. In the last 8–9 months inflation has remained below 2 per cent despite the economy growing, and in July it actually fell back to 1.6 per cent. You’d have thought that all this positive news would be driving consumption, which would pull through into increased demand, but that isn’t the case, especially for food.


One of the big constraints on consumption is the fact that average earnings remain weak. Up until 2008 inflation in the UK had typically run at around 2 per cent, but average earnings were growing at around 4 per cent, so each year people felt better off. Since then this has reversed, with average earnings below the level of inflation – currently at only 1.25 per cent per annum. One of the main reasons for this trend is that UK productivity is very low: economic growth has driven employment but not productivity growth so companies are employing more people at lower wages in real terms.


What we are seeing currently, therefore, is that increases in consumer spending are starting to come through, but largely driven by a fall in savings rates and through people spending existing savings. When this happens the expenditure tends to be on things like entertainment and construction – home improvements, holidays and new cars, for example – and not on core spend such as food.


Looking beyond the UK, agricultural markets including cereals, oilseeds and dairy, as well as potatoes, are down sharply. High prices in recent years have driven big increases in global production, supported by the thought of a price super cycle that would sustain prices. What’s more, the weather, which has been so challenging in recent years, has generally been good in 2014, resulting in good growing and harvesting conditions across the Northern Hemisphere. Consequently, supply availability is high in most major agricultural commodities.


Meanwhile, demand has slowed in China with fears that the economy there is slowing, and this has been echoed elsewhere. The picture is not all gloomy, however. Meat and sugar prices remain firm, but the overall picture is that agricultural prices are slowly tracking down from recent highs.


What about food prices in the UK, then? Well they have fallen dramatically, driven by a number of factors. Of course, lower agricultural commodity prices and lower general inflation will impact to an extent on food inflation – that is only to be expected.


But exchange rates have also played a part in keeping UK food prices down. Indeed, the Pound is up significantly from its low in March 2013, depressing domestic food inflation. Another significant factor is the start of a retail price war in the grocery market and this is only likely to intensify. For all the reasons stated above, the big food retailers have been under pressure in recent months. The grocery market is either static or falling in many key categories, with volume and value depressed due to falling demand. There is also structural and indeed cultural change going on. The rise of the discounters has been unprecedented, with Aldi and Lidl capturing the hearts and minds of middle class shoppers in a way that could never have been anticipated. What we are seeing is a polarisation of grocery shopping habits, with the discounters and premium retailers grabbing the growth, leaving the big four with a pretty torrid outlook. Their approach to this has been to fight it out on price, with significant reductions being seen across the high street in what has been termed by some as a ‘race to the bottom’.


Perhaps inevitably, there are some who are arguing that this retailer price war is now depressing farmgate prices as the retailers seek to maintain margins, sending the squeeze down the supply chain. But actually this is just part of the picture and the big question on everyone’s lips is what this all means in the longer term. We’ve all been told to expect volatile times ahead, but is the current trend for falling prices a true change from the ‘supercycle’ or simply a blip along the way? Will we ever see a revival of the UK’s demand for food?


Ultimately, the underlying trends are still positive. Population growth both in the UK and across the globe is set to continue; increased demand will result as there will simply be more mouths to feed. On top of this, if the robust and entrenched recovery in the UK economy continues then we will reach a point where unemployment stops falling and, at this point, wage increases will start to come through as economic growth drives productivity up. Assuming that the Bank of England manages the transition to higher interest rates well and manages to control inflation, then we will see a return to the days when wages will exceed inflation and this should drive core consumer spending, which can be expected to impact positively on food spending.


In the last six years, global agricultural and food markets have set new trading highs and it is expected that the current price falls will establish where the bottom of a new trading range is, before the underlying trends pull prices up again as shown in graphs II and III. It seems likely, therefore, that 2014/15 will see prices stabilise at a new low point before increases in consumer expenditure in 2015/16 start to spill out into food, encouraging prices back up. What we don’t yet know is where the bottom is but, once this is established, we are likely to see a wide range in which the market will move going forward.


Without doubt, challenges remain. Global population growth, urbanisation and the growing middle class (+3bn people in the next decade or so across the globe) will change the demand dynamics for food. Set against this, climate disruption, energy prices and availability and political unrest may limit the ability of primary producers to expand production.


The agricultural industry needs to deliver massive productivity growth, and new technology and increasing investment in R&D will help. But, like the uncertainty back in the year 2000 about quite what the new millennium would bring for computer systems, we cannot be certain what the future holds for food prices.


From year to year the balance of supply and demand will drive prices one way or the other, but global food and agricultural prices have moved permanently to a higher plateau and a new trading range is slowly establishing itself. The only certainty looking forward seems to be uncertainty and everyone in the food chain needs to prepare for volatile times ahead if they are to thrive.



European Food and Farming Partnerships is a specialist agri-food business consultancy, working along the whole supply chain. It combines farming knowledge with food industry expertise to address structural, commercial, operational and relationship issues across the industry, from an objective and independent standpoint.