Forget the hype, food is as cheap as it ever was

Food is likely to increase in price this year. Not as much as salaries, fuel or electricity; probably not as much as housing. But a bit. This is the prediction by the US Department of Economics. The increase is due to the ongoing effects of the 2012 drought and the increased demand from Asia.

Each time prices rise there are complaints from society and farmers take the flack.

Statistics New Zealand released ‘New Zealand in Profile 2014’ last month and the news was full of ‘beer is more expensive but milk is cheaper’. Social media then filled with comments along the lines of ‘nonsense, it is more expensive than ever’… thereby resorting to perception rather than the facts.

Statistics NZ has the data.

In 2008 2 litres of standard milk cost $3.23, in 2013 it cost $3.19. During the time period under consideration, GST increased from 12.5% to 15%. For milk this meant an increase of approximately 8c going to the Government not the farmer or processor or supermarket. Using the Reserve Bank of New Zealand Inflation calculator, in real dollar terms the 2008 price of $3.23 would be $3.68.

Inflation and GST confuse the understanding.

In addition, salary increases are quickly forgotten.

From April 2008 to April 2013, the minimum wage increased 14.6%. Inflation (2008Q1 to 2013Q1) was 11%. So, the minimum wage increased faster than inflation. From whole-year 2008 to whole-year 2013, per-capita GDP increased 9.7%. Mean weekly income increased 21%. Median weekly income increased 18.8%. Average household consumption expenditure increased 7.8%.

This means that the cost of living, including food, as a proportion of income decreased.

In New Zealand we are extremely fortunate to have nutritious, healthy food. It is produced by farmers and growers who use modern technologies that enable the nutritious food to be an ever smaller proportion of the household income almost every year.

Modern day food has transformed life - humans on average are taller and live longer than they did a hundred years ago. Medical advances are part of the story, but availability of food is also important. Between 1900 and 2000, a remarkable transformation in energy harvested per hectare occurred - almost a 400% increase. This allowed more people to be fed to a better state of nutrition than previously possible. In 1960 almost 25% of the global population of 3 billion people were undernourished. The FAO (Food and Agriculture Organisation of the United Nations) estimate published for 2013 is that undernourishment affected 12% of the global population of over 7 billion.

The big increase in productivity was achieved with the Green Revolution in the 1960s: the development of short-strawed cultivars, and the use of fertilisers and pesticides, revolutionised production systems.

Increased productivity had a dramatic effect on decreasing the price of food. American data indicate that in the 1930s, food accounted for approximately 25% of household income. By the 1960s it was 15% and now it is less than 10%.

Statistics NZ has reported that milk, cheese and eggs are 3.1% below their peak in July 2011, meat and poultry prices are 0.6% below their March 2013 peak, lamb prices are 11% below their August 2011 peak, and beef prices are 0.4% below February 2012.

Loss leaders and special offers do affect the index - but it is partly the deals, and the fact that the average supermarket basket now contains what used to be categorised as exotic items, that make it difficult for the shopper to assess what has happened.

Potatoes, tomatoes, lettuce, mushrooms and kumara were the top five vegetables bought last year. Bananas, apples, grapes, mandarins and oranges were the top five fruits.

Mushrooms and grapes are not staple, nor are they, and salad vegetables, confined to seasons any more. Vegetables and fruit are available all year round directly from harvest or via storage or other countries - and we pay.

Of further note in food expenditure is that more of the food dollar each year purchases prepared food and ready meals. The last Household Economic Survey (published at the end of 2010) reported a 12.7% increase in expenditure on ‘restaurant meals and ready-to-eat food’ since 2007. This category now accounts for 24% of food-related expenditure. In the year from January 2013 to 2014, food prices rose 0.9%, but restaurant meals and ready-to-eat food increased almost twice as much, rising 1.7%.

More of the food dollar is going to food processors and the number of cafes, restaurants - and the growth of delicatessen display cabinets proves the point. Supermarkets allocate space on margin per square metre - the more space allocated, the more profit.

FAO comparisons suggest that New Zealand food is approximately 12% of household income, which is similar to many developed countries. In New Zealand, however, food is produced without subsidies. In the OECD countries an average 20% of gross farm receipts are paid by the government (hence tax payers). Also of note is that in many developed countries, GST (or the equivalent) is not paid on fresh food.

In global terms, New Zealand doesn’t rank as expensive.

Mercer’s 2013 Cost of Living Survey of 214 cities worldwide puts Luanda in Angola as the most expensive city in the world in which to live, followed by Moscow, Tokyo, N’Djamena in Chad, Singapore, Hong Kong, Geneva, Zurich; Bern and Sydney are tied equal ninth. New Zealand cities don’t feature in the top 50.

New York is used as the base, and significant everyday items of expenditure compared – like accommodation, cinema tickets, blue jeans, a daily newspaper, soda, hamburger and fuel.

And a cup of coffee, which costs US$3.88 in Luanda, US$8.29 in Moscow and US$2.72 in New Zealand. But coffee isn’t food.

Milk is food and is also in the comparison list – 1litre of whole milk costs US$3.18 in Luanda, US$7.59 in Moscow and US$1.82 in New Zealand.

In the UK this year a supermarket war means that milk is being sold at £1 for a four pint (2.4 litre) carton, down from £1.39. Already the National Farmers Union has pointed out that this creates the impression - or illusion - that food is cheap which damages the agricultural industry and how the public view food.

The Numbeo.com web site gives cost of living in over 450 cities globally, and updates the data on a weekly basis. The groceries index (comparing prices with New York) for Lucerne, Switzerland is 180, for Wellington and Christchurch it is it is 108, and for Auckland it is 104. Auckland doesn’t make it into the top 50 expensive cities in terms of groceries; Wellington and Christchurch do. Darwin, Perth and Sydney are all more expensive than Auckland; Melbourne comes in between Wellington and Christchurch.

Data from many different sources combine to give the same story - food is not expensive in New Zealand.

It is, however, likely to get more expensive in the future. USDA economists believe that food price inflation is likely to increase 2.5-3.5% this year. Salaries are expected to increase more. The minimum wage increase is part of the story; economic growth is contributing. And economic growth is due to the Canterbury rebuild and dairy products…because everybody wants food.

Although it seems that food is more expensive each time one visits a supermarket, the reality is that average salaries increase more rapidly, which means that as a proportion of household income, food is as cheap as it has ever been.

Comments (4)

by Andrew Osborn on March 11, 2014
Andrew Osborn

Good post. What you detail is exactly the same as my personal experience.

Where we being hit badly:

1/ Rates bill 

In 15 years in my current house, never have my rates increases been equal or below inflation. Just how long does this go on for? When will we see a council that can manage its budget? When will we see a council that isn't tied in knots by its own bureaucracy?

2/ Power bill

As documented in various places recently, power bills have been shooting up for over a decade. Before this becomes a party political issue - this has been true for this current govt and the last. What's going on here?

by Fentex on March 11, 2014
Fentex

As documented in various places recently, power bills have been shooting up for over a decade. Before this becomes a party political issue - this has been true for this current govt and the last. What's going on here?

Sometime in the early to mid 1990's, I don't recall exactly when, I was talking to two Australian tourists andin the course of our conversation I made two predictions that came true.

One was that Australia would adopt GST, the second was that Nerw Zealands electricity charges were going to rise quickly and steeply.

My reasoning was simple, as NZ had at the time cheap power by international standards when compared to income, and when adopting market economics with freedom to set prices (presumably in competiton with others) the price of a good becomes what a market will bear (a measure competiton should help set) it is obvious that NZ's market could bear a lot more. 

So logically it would, and I think we see it does, And will some more as electricity production is increasingly privatised.

by Andrew Osborn on March 13, 2014
Andrew Osborn

A stake should've been driven through Max Bradford's heart befire he had chance to wreak havoc on the system.

The one-eyed ideology of privatisation is just as bad as the socialist ideology of state ownership. I never did see the point of turning a single state owned power company (ECNZ) into a handful of Mickey Mouse operators when the New Zealand GDP and population are only the size of Greater Manchester. All we've got is multiple billing systems, accountants and boards of directors.

 

 

by Graeme Edgeler on March 14, 2014
Graeme Edgeler

I buy the cheapest milk I can find, in 2-litre form. Can you tell me where I should have been buying milk for $3.19 over the last year? $3.39 is the cheapest I've seen it (Budget at pak n save) in the last 6+ months.

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