Consumers can expect significant rises in the price of basic food items in the coming year, according to industry sources who say an era of cheap food is coming to an end.
Increased international demand for food ingredients, bad weather and the diversion of grain supplies for the production of biofuels are some of the factors behind recent price rises in food ingredients.
"The price of raw materials for basic foodstuffs is going through the roof," says Paul Kelly of Food and Drink Industry Ireland (FDII). "First, grain prices went up and now dairy prices are following, and the results of these trends will be felt in the shops."
The price of milk powder on international markets has doubled in the past six months, a trend which will increase the cost of producing not just dairy products but also items such as pizzas and lattes.
Grain prices had already risen as a result of continuing drought in Australia and the reduction of EU reserve stocks. However, further increases are expected as more grain is used as fuel rather than food. This year, 40 per cent of the US maize and corn harvest is being used to produce fuel. About 85 per cent of the cost of producing pork or chicken goes on grain as a feed input, so the price of meat is also set to rise.
"For the last 20 years, we've seen a continuous downward pressure on farm prices, but that has changed," says food industry consultant Ciarán Fitzgerald. "It's a very different world we're looking at now."
"The result will be a significant rise in prices, though the exact amount will depend on the policy adopted by retailers. An era of cheap food is coming to an end."
Food inflation is almost 7 per cent in the US, 6 per cent in the UK, while in Ireland it stands at 2.5 per cent.
The boom in commodity prices is being driven by increased demand from China and India. Demand for milk in China is growing by 25 per cent a year, and up to one-third of requirements are being sourced in the EU. In Germany the increased demand has led to a 50 per cent rise in the cost of milk and many retailers have signed direct contracts with suppliers to ensure supply at a time of scarcity.
In the past, the EU worked its way through times of over- and under-supply using the intervention mechanism but most food mountains have since been dismantled. "With that option gone now, we are much more exposed to the volatility of world prices," comments Mr Kelly.
It is not all bad news for Ireland, however, with increased commodity prices set to benefit the farming sector and further grow our food industry, currently worth €8 billion a year in exports. In contrast to many other producing countries, Irish cattle are grass-fed rather than grain-fed, so beef here is less sensitive to changes in grain prices.
Mr Fitzgerald says Irish farmers could also enjoy new commercial opportunities in producing crops and animal products for fuel. The outbreak of foot-and-mouth disease in the UK could also push prices up, he says: "hopefully, this is a blip, while the other changes are fundamental".