Liam Dann: Never mind the tomato wars, food prices are set to rise

The New Zealand tomato wars still had nothing on the annual Tomatina festival in Bunol, Spain. An estimated 22,000 people threw 150 tons of fruit at the 2017 festival. Photo / Getty Images

OPINION:

Brace yourself, food prices are set to rise sharply.

Although, just to confuse things, we had news last week that the price of most basic foods has fallen in the past year.

Overall, the Stats NZ Food Price Index was up just 1.2 per cent for the 12 months to February.

But when you stripped out prices rises for restaurants, take-aways and ready-made meals, most food items saw a price decrease.

This was bad news for those of us who like to complain about our grocery bill.

Some readers were sceptical of the official numbers.

It certainly feels more like prices are always on the rise and I enjoy moaning about that as much as the next shopper.

Perhaps it is just that we just tend to notice price rises more than falls.

But then its hard to argue with the "tomato wars" that hit headlines last week.

A glut of locally produced tomatoes caused a supermarket price war to break out, with prices going as low as 8c a kilogram.

The so-called tomato wars were a marketing stunt of course, a loss-leader that supermarket owners were using to draw in shoppers.

But the Stats NZ figures also confirmed that tomato prices were at a 12-year low.

Like everything these days, the long shadow of Covid is hanging over the industry.

Shipping costs made it uneconomic to export large volumes of tomatoes which, combined with pretty good growing conditions, has cause this local glut.

Anyway, we should enjoy these prices and make tomato relish while we may.

The good news for those who enjoy complaining about their grocery bill is that food prices are almost certain to rise from here.

That's because global food commodity prices are the highest they've been in seven years.

It takes a few months for prices to flow through from commodity markets to supermarkets, but they always do.

On balance, commodity price spikes are good news for New Zealand.

The country is such an enormous net exporter of food that the current surge will mean billions of extra foreign-exchange dollars pouring into the economy.

Global dairy prices are up more than 25 per cent since the beginning of the year alone, and more than 40 per cent since this time a year ago.

That kind of increase will push the total value of our dairy exports above $20 billion and is the equivalent of finding a couple of spare wine industries down the back of the couch.

Given the big hole that tourism dollars are leaving in our current account, this is very good news.

It won't offset that loss but it will soften the blow.

And that's not to be dismissive of our $2 billion wine export sector either.

Every drop counts.

New Zealand wine exports bucked the global trend and grew during the pandemic.

In fact, most of our commodity exports are performing well.

Hastings Pak'nSave was selling tomatoes at an astonishing 9 cents a kilo on Wednesday. Photo / Supplied

The latest ANZ commodity index showed the value of New Zealand food exports up by 3.3 per cent in February to reach its highest level since April 2014.

That marries with the United Nations Food and Agriculture Organisation's (FAO) Food Price Index, which was up by 2.4 per cent in February.

This was its ninth month of consecutive rises, taking it to its highest level since July 2014.

A Rabobank report looking at the cause of the price spike seems to think it runs deeper than just pandemic disruption and will be sustained.

Agricultural commodity prices have surged almost 50 per cent since mid-2020, Rabobank said.

It identified La Nina weather restricting supply and resurgent global demand as two big drivers (along with market speculators and a low US dollar).

So it looks very much like commodity food exports are coming to the rescue of the New Zealand economy again.

A couple of seasons of high food-export prices couldn't be better timed to see us through until our borders reopen and our hardest-hit industries can rebuild.

It is true that the returns of a dairy boom aren't shared evenly.

But they do flow through the economy and create activity which should prevent things grinding to a recessionary halt.

An agricultural commodity boom will certainly have to be factored into Reserve Bank equations.

It may create more inflationary pressure than had been expected and that may mean interest rates rising sooner.

I've been writing a lot about inflation lately because where it lands post-Covid seems to be the big economic debate of the age.

It flows through to interest rates and investment markets and can be fairly abstract stuff.

Where inflation gets real for most people is when they see their grocery bill going up.

This what is worrying the economists watching global commodity prices.

Is your grocery bill set to rise? Photo / Richard Robinson

Rising food prices particularly bad for the poorest nations in the world, many of which are net food importers.

Sharp jumps in food prices can bring political instability. The Arab Spring revolutions of 2010 kicked off with riots about the price of bread.

Food-price inflation is not great for the poorest people in this country, either.

Food is a bigger fixed cost relative to income for those on low wages so food inflation hits the poorest hardest.

Even as a net beneficiary of higher global food prices, New Zealand won't be immune from the risk of the trend further widening an already worrying wealth divide.