Rising prices from producers to stores

This has been a black year for the food business, with at least one third of total revenues falling victim to extreme weather conditions. According to recent statistics, a decline of 10-60 per cent in revenues is foreseen in most branches of the industry, except meat, fruit, vegetable processing and the production of soft drinks. Consumer are just getting familiar with new food prices. The trend of rising food prices does not only apply to Hungary, it is a world-wide phenomenon. Prices rises in 2007 are regarded as exceptionally high, as the effects of the global trend and unfavourable weather in the region have been cumulated. The rate of growth for food prices is expected to accelerate in the remaining part of the year, with price rises of 10-15 per cent expected in the next few weeks. According to György Magyar, secretary of the National Association of Agricultural Co-operatives and Producers, breeders of livestock will probably have the hardest time, with many bankruptcies and liquidations coming. KSH data shows growth in GDP of only 1,4 per cent for the second quarter, which is far worse than even the most pessimistic expectations had been. Lőrinc Soós, director of Info-Datax Kft. believes that the restrictive measures of the Gyurcsány government and the negative performance of the agricultural sector are to blame for this. In his opinion, overall decline in revenues for the food business will be around 20 per cent by the end of 2007. A possible negative effect of this might be the stopping of the concentration process in agriculture and regarding retail trade, the revival of consumer marketplaces. Attila Boródi, acting deputy chairman of the National Association of Food Processing Enterprises, is also worried about the negative effects this trend is likely to have on competition. While pre-tax profits for the industry in 2005 had totalled HUF 46 billion, this amount was only HUF 40 billion in 2006 and the value of production has stagnated. As profitability is very low (2 per cent) in the food industry, multinational companies are expected to continue their withdrawal from the market. The price of sunflower seed for example, has increased by 50 per cent within a year. András Köves, sales director of Bunge Zrt., the largest domestic purchaser of sunflower seed, has told us that they are planning to buy at least half a million tons, which would still be less than what their processing capacity could handle. The price of cooking oil will inevitably rise, as the price of sunflower seed accounts for 85 per cent of total cost. The price of margarine is also expected to rise. According to Márta Szilágyi, managing director of Royal Brinkers Hungary Kft., the only producer in Hungary, a price rise of 20 per cent would be needed, but so far only 4-5 per cent has been accepted by retail partners. Mrs. Menczel, secretary of the Product Council for Meat and Livestock, believes that a lot depends on what incentives the government will be able to provide for a breeders of livestock to stay in business. She is not worried about the return of times when illegal slaughter of swine and illegal trade in pork was common practice. According to Tamás Éder, chairman of the Meat Association, consumers should not worry about a major rise in meat prices, as illegal trade accounts for 30 per cent of total sales the meat sector. Prices will however, rise because the price of fodder accounts for 60-70 per cent of total production cost. Boldizsár Ilonka, chairman of the Association of Bakeries has told us that price rises have already begun. The level of production has also been reduced by 10-20 per cent in some bakeries, as a result of shrinking demand. He thinks that the only way out of his situation is innovation. Today, even medium size bakeries have several hundred products. According to György Vámos, general secretary of the National Association of Retailers, it is still uncertain what part of the 10-30 per cent price rise requested by suppliers will be accepted by retail partners. The retail industry originally expected demand to recover in the second quarter of the year, whereas demand is expected now to continue to shrink. He believes that the structure of consumption will change, and cheaper products will become more popular, leading to an expansion of sales in the discount-style channels. Many independent stores are expected to close or join one of the domestic chains. László Murányi, CEO of Coop Hungary Zrt. has told us that their turnover had declined by 0,8-0,9 per cent and the same is expected for the second half of the year.