Food Price Pressure

Europe-wide Supply Pressures are Making Food Costs Rise Sharply

In today’s highly integrated world, economic shifts occurring continents away can be felt in the Billa around the corner. This is not a new phenomenon, but rather one that policy makers, businessmen, and consumers are constantly adjusting to.

The European-wide increase in food prices – doubling in just a few months for some grains – seems to be a result of exactly these shifts; some of them occurring here in Austria and others in faraway Southeast Asian.  Though the Austrian media has predicted the end of the affordable Schnitzel, experts claim that recent trends reflect changes in short-term supply and demand, and are triggering developments that will have a more enduring effect.

In Austria, food prices have increased 3.1% since the first half of 2006, according to the latest figures from Statistik Austria. Meat products have been hit the worst, with beef sirloin and the beloved calf Schnitzel rising as much as 8%.  Milk, cheese and egg products became 4.5% more expensive- though yoghurts and imported cheeses like Gouda saw increases of up to 7%. Bread and other grain products rose an average of 3.7%, with white bread toping the list.

Together, the food price increases are bringing Austrians, on average, to spend a full 11% of their income on food and non-alcoholic beverages.

Shopping at Billa; customers now have to deal with an increase in food prices | Photo: Federico Guendel

The causes of the price increases are many.  The first, and most obvious, is growing world demand pushing market prices upward, particularly demand from China and India.  Not only are these populations growing, but they are eating more as economic advancement increases their purchasing power and the range of available foods. According to the OECD Agricultural report, non-OECD countries are eating up to 60% more cheese and dairy products, and 40% more meat, exactly the products that are getting pricier in Austria.

Another cause is the reduction of agriculture subsidies in developed nations, which has tightened the supply of many crops.  After World War II, Europe offered significant financial aid to farmers to stimulate production of food for a devastated continent – at times creating surpluses in the desire to rebuild the sector.

The subsidies continue to keep European supplies above demand. It is a hotly debated issue in Brussels, and outside pressure has led to a change in policy – including quota and tariff reductions – which is subjecting the European agriculture industry to the natural laws of supply and demand for the first time since the 1960s. Though this is putting a rein on supply, increased production in developing nations are expected to push prices down in the future.

Other factors include climate change and the diversification of arable land use. Natural disasters, draughts, and heavy rains – weather patterns many scientists blame on global warming – have destroyed harvests in recent years and caused the prices of staple crops, particularly wheat, to swell.

Diversification of land use, an increasingly pressing issue, particularly for Austria, is causing a similar squeeze on farmland.  As the price of fossil fuels continues to rise and reduction of CO2 emissions continues to concern policy makers, the result is a higher incentive for farmers to switch to the bio-fuel industry instead of traditional agriculture. Land once allocated to crops for livestock and human consumption is now destined to grow corn, wheat and rape seed for bio-diesel and bio-ethanol production.  Starting Oct. 1 of this year, petrol in Austria will contain a 4.4% bio-ethanol mix; Austrian diesel has contained a similar ‘bio’ percentage for the last two years.

Rising costs of fossil fuels around the globe have led to a substantial increase in costs for producers. Fertilizers and transportation are more costly, which has led to an increase in every aspect of farming, from harvesting to the distribution of crops and livestock.  These costs are passed down the supply chain and eventually reach the consumer.

As borders open, subsidies are reduced, and protectionist measures lifted, Austria will be more subject to price fluctuations. Today, however, Austria will only experience minimal effects of these trends compared to other countries.  Currently, 84% of all agriculture-related imports to Austria come from EU nations, and 72% of all Austrian exports are sent to other EU members.  While this doesn’t make Austrian products and prices immune to the economic forces, it does create a buffer.

Some Eastern European nations are dealing with more drastic measures. Bulgaria, for example, has experienced a 25% increase in foodstuff prices this year alone.

As for the land squeeze, Austrian Agriculture Minister Josef Pröll insists that increased use of farmland for alternative energy is not responsible for higher costs at the supermarket.  According to the ministry, only 105,000 of the total 1.3 million hectares of domestic farmland are used for bio-fuel production, which should not have a large impact on food prices.

According to Alois Guger, an employment and income specialist at the Austrian Institut für Wirtschaftsforschung (WIFO), the Ministry’s stance is politically influenced.

“This is merely an example of special interest politics,” Guger claimed in an interview with The Vienna Review. “The production of alternative fuels is very costly and even more so when considering how bio-fuels affect the overall cost of energy.”

Some in Austria blame the Euro.  According to Statistik Austria, accumulative inflation since the introduction of the Euro is roughly 10.9%.  The prices of food and beverages have risen by approximately 11.7% in the same time frame, showing nothing out of the ordinary.  The strong Euro is even less of an issue, Guger confirmed. “If anything, the strong currency is tempering inflation by making imports cheaper,” he said.

There is also strong domestic sentiment to  ‘buy Austrian.’  Though some expect this to stimulate the domestic production, high quality domestic meats and dairy products are often more expensive than imports.  Market experts claim that as many as 26,000 jobs could be created by buying local foods. ‘Consumer patriotism’ increases the ability to control the quality of produce and methods of production, says Friedrich Schneider of the Johannes Kepler University.  In a recent study, he showed that if every third consumer chooses an Austrian product over an imported one, the domestic GDP could rise by three billion Euros and raise aggregate national income by some two billion.

While the EU may limit trade barriers, it cannot stop national efforts to influence its population.  Whether consumers will choose national pride, or simply higher domestic quality, over lower priced imports still remains to be seen.

Although higher food costs may not harm the Austrian economy as a whole, sociologists say the effects are measurable, with low-income families carrying the heaviest burden.  Households in the lowest brackets will spend over 30% of total income on foodstuffs, while wealthy households spend just over 10% of total income.

The overall economic impact of these shifts remains to be seen, especially as general living costs – also expected to hit the poorer brackets of Austrian society hardest – are also expected to rise, with some predicting a 9% increase in housing costs.

“Expenditures on food and housing are increasing much more than industrial goods,” Guger said, “while the domestic wage increase is rather modest.” These trends will greatly affect how the government sets policy, particularly as it tackles pension reform.

How long the trend will continue is hard to say, and economists at the WIFO expect the increase to stabilize in the near future. However the economy can be unpredictable.

“The recent phenomenon is closely related to world market developments,” Guger said, “and future trends depend on further price increases in consumer goods and, particularly, energy.”

For the time being, however, Austrians can continue to enjoy their Schnitzel. The common pork version is still priced under €9-, at most restaurants, the traditional calf version around €13-.

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