Food prices rose again in February, with energy costs and the VAT deduction playing a role in the mix. Across a broad basket of goods, food prices are up more than 15% according to the Consumer Price Index statistics from the National Institute of Statistics. The First Vice President notes that time must be allowed for cost reductions and government measures to translate into lower final food prices. The Minister of Agriculture mentions that the February price analysis, conducted by a major company, supports the idea of fine-tuning the measures approved at the end of December 2022. The INE released the February CPI data on March 14, clarifying that several factors impede any immediate moderation in food prices.
Delayed effective energy costs
Electricity and fuels form a significant part of the cost structure for farming and livestock operations. Energy prices rose more than 20% in April 2021, yet the increase in food prices remained below the general CPI through March of the following year. This indicates a clear lag in how energy costs feed into food prices. The slowdown in energy prices, evident since October 2022, may also arrive late in the cost of groceries.
Raw materials and packaging
Agricultural groups estimate that production costs in farming and animal husbandry rose by roughly 55% to 60% on average in the last two months. They argue that this surge in input costs is not yet reflected in consumer prices. The energy price tensions that began with the invasion of Ukraine affected feed and fertilizer from the outset. A PwC study from October 2022 for producers and distributors AECOC noted a 94% jump in barley feed costs. Fertilizer prices tripled last year, according to the Ministry of Agriculture. The AECOC report also points to a roughly 20% rise in the cost of containers and packaging for many beverages and foods. The transfer of these costs to final prices is expected to lag in both the primary sector and the processing industry, suggesting a continued rise in food prices. Andres Góngora, head of COAG’s fruit and vegetable sector, notes that the government approved 300 million dollars in fertilizer-cost relief, but the design of the measure may limit its effectiveness.
New plastic tax
The new tax on non-recycled plastic containers, effective January 1, 2023, has become an added factor pushing some foods higher in price. The tax charges 0.45 euros per kilogram of non-recycled plastic in taxable products. The Spanish Federation of Food and Beverage Industries FIAB estimates that the collection impact on the food sector is around 690 million euros, surpassing the budgetary impact anticipated from the VAT reduction on food approved by the government. The December 27 adjustment (660 million euros) remains in effect through June.
Supermarket margins
The government’s second vice-president has focused on the margins earned by supermarkets in an effort to explain the persistent rise in food prices. A cap on food prices has been proposed as a means to limit distribution margins, though farmers and ranchers have voiced concerns. Andrés Góngora of COAG warns that setting a cap on final prices effectively caps the price at the source. In contrast, AECOC notes that the industry has reduced margins since the pandemic began, pointing to higher production costs in specific products: potato chips costs rose by 72% since January 2021, while retail prices grew by 17%. Sausages saw a 57% increase in production costs, with prices rising only 6%. Bread costs rose 43% since January 2021, while retail prices increased by 15%.
Harvest failures and farm closures
Poor harvests, such as olives and winter vegetables, along with the closure of dairy farms, have pushed up origin prices for several agri-food products. Ministry of Agriculture data shows olive oil prices in certain categories are currently about 60% higher on average than the previous campaign and roughly 100% higher than the average of the prior four campaigns. While the raw material is a key driver, it is not the sole cost behind olive oil purchases. In January, olive oil registered a yearly price increase of about 30.5% according to CPI figures. The raw milk price paid to farmers reached 57.96 euros per 100 kilos in December, a 64% rise year over year. The January-December 2022 period shows an average price 41.8% higher than the five-year average, and CPI data indicate a 33.4% rise in milk prices on supermarket shelves.