Low Oil Prices + Low Feed Prices = Low Food Prices

This year, food prices may reach multi-year lows, as the much lower price of oil will add to already significant deflationary pressure on food prices, resulting from lower commodity and feed costs (see Figure). Initially, the combination of both lower oil and commodity costs will provide some margin improvement, while some sectors and regions will benefit from longer-lasting lower costs, depending on the competitive settings. And, in the current global macro-economic climate, we expect most of the benefits will eventually be passed down to the consumer. This will be aided by increased competition from an expanded distribution radius, as transport costs are lowered across the board.

Picture of oil pump in Nebraska

For global F&A itself, oil is not a major cost factor, and lower prices will provide a limited upside to margins. However, the economics of some specific F&A sectors will materially change, affecting volumes and margins. Wild-catch seafood and biofuels production will be the most affected sectors from a cost and competition perspective, respectively. Where oil and gas prices are linked, in specific industries with high gas consumption—such as horticulture, milk powder, coffee, potato processing and beer production—costs are likely to be lowered and margins improved, at least initially.

While lower food prices will be welcomed by consumers, they will not affect consumption levels greatly, considering the relatively low price and income elasticity of food and beverages. Lower food prices will drive up volumes mostly for upmarket food and drink, and in developing regions, where food makes up a bigger part of household spending. From a demand perspective, Rabobank expects the biggest volume increase to be through upmarket food and beverage consumption, such as food services, wine and spirits, beef and pork, exotic fruits and fruit juices.

For the food and agribusiness (F&A) supply chain, energy is the third-largest cost input factor, after raw materials and labour. From farm machinery to distribution to packaging: oil adds costs at every step. But natural gas is more important than oil—it’s a processing fuel in many food and beverage industries, where it is used for drying, cooling, processing and storage. For the industry as a whole, we estimate energy at around 15 percent of total costs, with oil making up a third of this.

In primary crop production farming , energy accounts for 13 percent of total costs in the United States, split 50/50 between direct energy and fertiliser costs. The energy intensity of crop farming has declined as productivity has risen, with costs now at 15 percent to 25 percent of the total, depending on the crop. There is potential for further decline, with measures such as no-till acreage, low-pressure irrigation systems, manure substitution for fertiliser and precision agriculture. In contrast, livestock production has around a third of the energy cost intensity of crop farming. Most of the energy consumption in today’s F&A chain takes place downstream, at the processing and distribution stage.

February 2015 Graph of Oil Prices Falling

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