<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Dec 22, 2008
FOOD PRICE ADJUSTMENTS
</TR><!-- headline one : start --><TR>Reasons for time lag
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to Tuesday's letter ('Food price still high at FairPrice') and Thursday's letter, 'Essential goods at affordable prices''.
The issues that were raised show that end-user food prices represent a perennial concern for many Singaporeans.
Such prices are largely - but not solely - dependent on the prices of agricultural commodities such as grain, animal protein and oilseeds. Although global prices of such commodities have recently fallen from the peaks seen earlier this year, it usually takes some time before end-user food prices are adjusted accordingly.
There are two main reasons for this time lag. Firstly, suppliers usually procure their goods via long-term contracts (which could range from several months to a few years in duration) at prices that are fixed at the start of these contracts. Thus, they have no choice but to sell their goods at higher prices to cover costs even though commodity prices may have fallen over time. Secondly, suppliers typically maintain old inventory which can be sold at lower prices to make way for fresh supplies.
In Tuesday's letter, the writer noted that prices for rice and several other food items remained high. Based on Rabobank's studies as a food and agribusiness bank, global prices of wheat, corn, soybean, sugar, oil and other essentials dropped by more than 30 per cent between June and December.
Agricultural commodity prices merely reflect the cost of trading in these items on global markets, while end-user food prices reflect additional costs incurred along the entire supply chain. For example, end-user prices for margarine do not depend solely on the prices of its ingredients such as crude palm oil. Additional costs are also incurred by players along various stages of the supply chain, such as food processing, packaging, transportation and distribution. The end-user prices will depend on the extent to which costs are passed down along the entire supply chain.
Additionally, many kinds of agricultural commodities are also traded as investment products on futures exchanges or other trading platforms. Therefore, their daily prices fluctuate and do not fully reflect the total cost of producing end-user food items.
In summary, end-user food prices hinge on a complex interplay of market forces and do not necessarily follow movements in agricultural commodity prices.
Rabobank International trusts that our insights will help to educate the public on the complicated relationship between agricultural commodity prices and end-user food prices. Oscar Tjakra
Assistant Manager
Food & Agribusiness Research and Advisory
South-east Asia
Rabobank International
FOOD PRICE ADJUSTMENTS
</TR><!-- headline one : start --><TR>Reasons for time lag
</TR><!-- headline one : end --><!-- show image if available --></TBODY></TABLE>
<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to Tuesday's letter ('Food price still high at FairPrice') and Thursday's letter, 'Essential goods at affordable prices''.
The issues that were raised show that end-user food prices represent a perennial concern for many Singaporeans.
Such prices are largely - but not solely - dependent on the prices of agricultural commodities such as grain, animal protein and oilseeds. Although global prices of such commodities have recently fallen from the peaks seen earlier this year, it usually takes some time before end-user food prices are adjusted accordingly.
There are two main reasons for this time lag. Firstly, suppliers usually procure their goods via long-term contracts (which could range from several months to a few years in duration) at prices that are fixed at the start of these contracts. Thus, they have no choice but to sell their goods at higher prices to cover costs even though commodity prices may have fallen over time. Secondly, suppliers typically maintain old inventory which can be sold at lower prices to make way for fresh supplies.
In Tuesday's letter, the writer noted that prices for rice and several other food items remained high. Based on Rabobank's studies as a food and agribusiness bank, global prices of wheat, corn, soybean, sugar, oil and other essentials dropped by more than 30 per cent between June and December.
Agricultural commodity prices merely reflect the cost of trading in these items on global markets, while end-user food prices reflect additional costs incurred along the entire supply chain. For example, end-user prices for margarine do not depend solely on the prices of its ingredients such as crude palm oil. Additional costs are also incurred by players along various stages of the supply chain, such as food processing, packaging, transportation and distribution. The end-user prices will depend on the extent to which costs are passed down along the entire supply chain.
Additionally, many kinds of agricultural commodities are also traded as investment products on futures exchanges or other trading platforms. Therefore, their daily prices fluctuate and do not fully reflect the total cost of producing end-user food items.
In summary, end-user food prices hinge on a complex interplay of market forces and do not necessarily follow movements in agricultural commodity prices.
Rabobank International trusts that our insights will help to educate the public on the complicated relationship between agricultural commodity prices and end-user food prices. Oscar Tjakra
Assistant Manager
Food & Agribusiness Research and Advisory
South-east Asia
Rabobank International
