Inflation badly affects everyone, everywhere and the food industry is no exception.
If one compares historical data pertaining to retail prices of processed foods, the impact of inflation on the food industry will be immediately evident.
Senior citizens would remember that a big bar of chocolate was available at Rs 5 in retail in the 70s. One could have a full meal in a decent Chinese restaurant from soup to dessert for under Rs 20.
Then, a litre of buffalo milk cost about Rs 5 per litre, butter about Rs 10 per kg and pure ghee Rs 13 per kg. Current prices are Rs 44 per litre for buffalo milk, Rs 300 per kg for butter and Rs 385 per kg for ghee.
Inflation on acceleration
Inflation has been accelerating during the past years. For example, liquid cow milk cost Rs 15 per litre wholesale in January 2010 and has shot upto Rs 25 per litre in 2013, an increase of 70% in three years. Price of skimmed milk powder in 2010 was Rs 120 per kg wholesale and currently is Rs 230 per kg wholesale i.e. an increase of nearly 92% in three years! Retail price after adding packaging, transport, taxes, distribution and relative profit would add approximately 40% to the wholesale price.
Naturally, the food industry, which is entirely dependent on agricultural, horticultural, dairy, livestock and fisheries’ produce is the first to be hit by galloping costs.
The impact on consumer prices however is not in direct proportion to the increase in raw material cost because of various factors, except in case of single ingredient products like ghee, butter, fruit juice, and sugar.
Composite foods
The majority of processed foods are composite that is they have many ingredients in defined proportion, i.e. recipe or formulation. In such cases, the impact of increased cost of a single ingredient or raw material will be much lower on the total cost of the product. Therefore if the particular ingredient or raw material price has increased by 100% the price of the finished product (in which the item is an ingredient) may be increased by 5-10%.
Another way manufacturers try to minimise price increase is to reformulate the product in such a way that cost is reduced without affecting taste, appearance and other aspects which the consumer can easily discern.
The last option is to reduce the quantity in the consumer pack to the required extent to maintain the retail price or increase it minimally. Examples are biscuits, jams, chocolates, pickles, ready-to-cook mixes and ready-to-eat foods.
Domino effect
Since the economy is integrated, a cost-push in any one sector has a domino effect on all other sectors. If international price of crude oil increases due to demand exceeding supply or fears of war, political instability and other similar reasons, the price of petrol and diesel immediately goes up. So transport and conveyance cost increase. Fertiliser cost increases. That’s the start. When cost of agricultural inputs and transport increases, the government increases the minimum support price, which makes it possible for farmers and middlemen to sell the produce in open market at higher prices and so on.
The weather can play villain too! Witness the tears that onion prices have wrought. Crops were damaged due to excess rainfall and stormy weather resulting in shortfall. Whether the price increase was proportionate to the demand-supply mismatch is another issue. The trade chain is not a paragon of virtue. Most are waiting for an opportunity to make a quick buck!
Shortages
Again, senior citizens would remember the 60s and 70s, the era of shortages, when everything was rationed and nothing was available thanks to socialistic ideology. If one wanted to buy a two-wheeled scooter the wait could be as long as 20 years. However, if a buyer was ready to pay double of the official price, he/she could get immediate delivery from middlemen and agents.
Scooter tyres whose actual price was Rs 90 each were being sold at around Rs 270 each. The wait for a landline telephone connection was 10 years but of course going through the right channel could get you a connection quickly.
Ideologists and socialists may call it a “black” market but economists know better. Price is the mechanism, which brings about equilibrium between demand and supply.
In the good old days, money supply was linked to gold. Governments could only print currency notes equal to the value of gold held by them. That ensured that there was virtually no inflation. The government was also under an obligation to balance its income and expenditure.
Indira Gandhi introduced the first Budget in Parliament around 1969 with a paltry deficit financing of Rs 50 crore. She was nervous and fearful of the reaction in Parliament. She thought the MPs would be all over her, demanding that there should be no deficit and government should curtail its expenditure. No such thing happened. Nobody in Parliament uttered a word. Neither did the media nor anyone else in the country and the first deficit budget was passed without a murmur.
The consequences
No doubt, intelligent people in the country would have foreseen the consequences. I did too and told whoever was willing to listen that the country was headed for disaster. The deficit would keep on growing and growing and indeed it has. The deficit now runs into thousands of crores every year.
Inflation can be triggered by many causes both within the country and also by events in other countries. Indeed inflation can be sparked off even by rumours! The first casualty is usually food. After the first world war, which ended in Germany’s defeat, there was runaway inflation there. A loaf of bread required a satchel of Deutschemarks to buy. A few years ago, in 2008-2009 there was similar galloping inflation in Zimbabwe so much so that prices doubled between morning and evening of the same day. The cost of a bus ticket from home to school was equal to a month’s salary of a teacher. The Zimbabwe government went on printing notes of ever-higher denominations because regular denominations of 5, 10, 50, 100 could no longer buy anything.
Ultimately the solution was to demonetise Zimbabwe’s own currency and make the US$, the legal tender in Zimbabwe. Only then did the inflation come under control!
Exchange rate
Inflation affects exchange rate negatively too. Old timers may remember that at Independence in 1947 the exchange rate of Indian Rupee and British £ was one to one. That’s right 1 for 1! Now, sadly, it’s Rs 100 for £1.
I can remember in the 70s when I went on my first trip overseas the exchange rate was Rs 4 for $1. Then it increased to Rs 7 for $1 and then crept upwards to Rs 18 to $1. Then the rupee was devalued and exchange rate because Rs 32 to $1 and so on till now, when it reached Rs 63 per US$.
When prices rise in a country due to inflation, the country’s exports become uncompetitive in international markets and exports reduce. To maintain and increase competitiveness the government resorts to devaluation. Whether it is a solution, is highly debatable.
If China is considered by way of comparison, Chinese goods are so cheap in international markets that all other countries including USA are demanding an upward revaluation of the Chinese Yuan so that Chinese goods become costlier and other countries who are unable to produce goods as cheaply as China, can compete! But the Chinese government is maintaining the exchange rate of 7 Yuan per US$ and refuses to revalue.
At the time of writing, the current crisis is ordinary table salt, which is such an abundant commodity that the wholesale price is little over Rs 4 and retail price is just over Rs 8. Due to disruption in supply in the North-Eastern states retail price has shot upto Rs 100-150/kg. God help us!
If one compares historical data pertaining to retail prices of processed foods, the impact of inflation on the food industry will be immediately evident.
Senior citizens would remember that a big bar of chocolate was available at Rs 5 in retail in the 70s. One could have a full meal in a decent Chinese restaurant from soup to dessert for under Rs 20.
Then, a litre of buffalo milk cost about Rs 5 per litre, butter about Rs 10 per kg and pure ghee Rs 13 per kg. Current prices are Rs 44 per litre for buffalo milk, Rs 300 per kg for butter and Rs 385 per kg for ghee.
Inflation on acceleration
Inflation has been accelerating during the past years. For example, liquid cow milk cost Rs 15 per litre wholesale in January 2010 and has shot upto Rs 25 per litre in 2013, an increase of 70% in three years. Price of skimmed milk powder in 2010 was Rs 120 per kg wholesale and currently is Rs 230 per kg wholesale i.e. an increase of nearly 92% in three years! Retail price after adding packaging, transport, taxes, distribution and relative profit would add approximately 40% to the wholesale price.
Naturally, the food industry, which is entirely dependent on agricultural, horticultural, dairy, livestock and fisheries’ produce is the first to be hit by galloping costs.
The impact on consumer prices however is not in direct proportion to the increase in raw material cost because of various factors, except in case of single ingredient products like ghee, butter, fruit juice, and sugar.
Composite foods
The majority of processed foods are composite that is they have many ingredients in defined proportion, i.e. recipe or formulation. In such cases, the impact of increased cost of a single ingredient or raw material will be much lower on the total cost of the product. Therefore if the particular ingredient or raw material price has increased by 100% the price of the finished product (in which the item is an ingredient) may be increased by 5-10%.
Another way manufacturers try to minimise price increase is to reformulate the product in such a way that cost is reduced without affecting taste, appearance and other aspects which the consumer can easily discern.
The last option is to reduce the quantity in the consumer pack to the required extent to maintain the retail price or increase it minimally. Examples are biscuits, jams, chocolates, pickles, ready-to-cook mixes and ready-to-eat foods.
Domino effect
Since the economy is integrated, a cost-push in any one sector has a domino effect on all other sectors. If international price of crude oil increases due to demand exceeding supply or fears of war, political instability and other similar reasons, the price of petrol and diesel immediately goes up. So transport and conveyance cost increase. Fertiliser cost increases. That’s the start. When cost of agricultural inputs and transport increases, the government increases the minimum support price, which makes it possible for farmers and middlemen to sell the produce in open market at higher prices and so on.
The weather can play villain too! Witness the tears that onion prices have wrought. Crops were damaged due to excess rainfall and stormy weather resulting in shortfall. Whether the price increase was proportionate to the demand-supply mismatch is another issue. The trade chain is not a paragon of virtue. Most are waiting for an opportunity to make a quick buck!
Shortages
Again, senior citizens would remember the 60s and 70s, the era of shortages, when everything was rationed and nothing was available thanks to socialistic ideology. If one wanted to buy a two-wheeled scooter the wait could be as long as 20 years. However, if a buyer was ready to pay double of the official price, he/she could get immediate delivery from middlemen and agents.
Scooter tyres whose actual price was Rs 90 each were being sold at around Rs 270 each. The wait for a landline telephone connection was 10 years but of course going through the right channel could get you a connection quickly.
Ideologists and socialists may call it a “black” market but economists know better. Price is the mechanism, which brings about equilibrium between demand and supply.
In the good old days, money supply was linked to gold. Governments could only print currency notes equal to the value of gold held by them. That ensured that there was virtually no inflation. The government was also under an obligation to balance its income and expenditure.
Indira Gandhi introduced the first Budget in Parliament around 1969 with a paltry deficit financing of Rs 50 crore. She was nervous and fearful of the reaction in Parliament. She thought the MPs would be all over her, demanding that there should be no deficit and government should curtail its expenditure. No such thing happened. Nobody in Parliament uttered a word. Neither did the media nor anyone else in the country and the first deficit budget was passed without a murmur.
The consequences
No doubt, intelligent people in the country would have foreseen the consequences. I did too and told whoever was willing to listen that the country was headed for disaster. The deficit would keep on growing and growing and indeed it has. The deficit now runs into thousands of crores every year.
Inflation can be triggered by many causes both within the country and also by events in other countries. Indeed inflation can be sparked off even by rumours! The first casualty is usually food. After the first world war, which ended in Germany’s defeat, there was runaway inflation there. A loaf of bread required a satchel of Deutschemarks to buy. A few years ago, in 2008-2009 there was similar galloping inflation in Zimbabwe so much so that prices doubled between morning and evening of the same day. The cost of a bus ticket from home to school was equal to a month’s salary of a teacher. The Zimbabwe government went on printing notes of ever-higher denominations because regular denominations of 5, 10, 50, 100 could no longer buy anything.
Ultimately the solution was to demonetise Zimbabwe’s own currency and make the US$, the legal tender in Zimbabwe. Only then did the inflation come under control!
Exchange rate
Inflation affects exchange rate negatively too. Old timers may remember that at Independence in 1947 the exchange rate of Indian Rupee and British £ was one to one. That’s right 1 for 1! Now, sadly, it’s Rs 100 for £1.
I can remember in the 70s when I went on my first trip overseas the exchange rate was Rs 4 for $1. Then it increased to Rs 7 for $1 and then crept upwards to Rs 18 to $1. Then the rupee was devalued and exchange rate because Rs 32 to $1 and so on till now, when it reached Rs 63 per US$.
When prices rise in a country due to inflation, the country’s exports become uncompetitive in international markets and exports reduce. To maintain and increase competitiveness the government resorts to devaluation. Whether it is a solution, is highly debatable.
If China is considered by way of comparison, Chinese goods are so cheap in international markets that all other countries including USA are demanding an upward revaluation of the Chinese Yuan so that Chinese goods become costlier and other countries who are unable to produce goods as cheaply as China, can compete! But the Chinese government is maintaining the exchange rate of 7 Yuan per US$ and refuses to revalue.
At the time of writing, the current crisis is ordinary table salt, which is such an abundant commodity that the wholesale price is little over Rs 4 and retail price is just over Rs 8. Due to disruption in supply in the North-Eastern states retail price has shot upto Rs 100-150/kg. God help us!
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