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Posted: **24 Oct 2005, 00:50**

A friend of mine just sent me and email asking about the relationship between food costs and oil costs. This was my take:
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In the UK, at least, the supermarket chains pressure the rest of the food industry. They have the power to dictate whatever terms they want to the suppliers: contracts for lettuce delivery, for example, will have clauses that allow the supermarket to either half or double the size of the delivery with only a few hours notice. Shrunk orders force the suppliers to take the hit on surplus supply, and for increased orders they have to rush order from other suppliers to make up the difference. It hurts their bottom-line, of course, but not as much as being dropped by the supermarkets for failing to meet the contract. (I've gotten this from "Not on the Label" by Felicity Lawrence.)

What does this have to do with oil prices? Most of the fertilizer and oil costs are paid by the suppliers and not the supermarkets; they'll complain, certainly, but the supermarkets are already pushing the suppliers to the breaking point, so they're used to dealing with pressure. I'd imagine the suppliers will probably be able to bargain a little breathing room because of oil increases, but it won't equal their extra cost?the rest of the slack will be taken up by further "innovative" cost-cutting measures elsewhere in the chain: lower health and safety standards, more immigrate labour, poorer working conditions, etc.

So the price-tags at Safeway will rise, but no where near as fast as the oil price. I tend to verge a little on the more apocalyptic side of peak oil predictions, but my feeling is that this trend will simply continue until it reaches it's own breaking point or a general "trigger-point" is reached elsewhere in the societal system.
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Would others agree with that? Is there anything I've missed?

Posted: **24 Oct 2005, 07:47**

jwanders wrote: Would others agree with that? Is there anything I've missed?

There are limits to everything. No farmer (or "lettuce producer") can run at a loss for extended periods. Where the breaking points are, that is a thing left to find out.

Posted: **24 Oct 2005, 10:19**

Ohh... juicy contreversy! My friend has a very different take, which I figured I'd post to see which of us is righ?ahem... to get other people's opinions on.

(Canadian translations: "IGA" is a supermarket similar to Morrisons, while "Capers" and "Whole Foods" are mid-sized stores specializing in high quality organic and local foods; an animal I've yet to find in the UK)

I disagree. It truly depends on which country you are in; yes, that may happen in some places. But in others, you'll get farmers going out of business and food prices going up. And supermarkets closing down, allowing other markets to raise their prices. And lots of organic food stores being more and more profitable. I guess what I mean is, I can see many other ways the system could adjust, not just through monopoly pressure. Supermarkets only can do that because they are right at the edge of bankruptcy themselves. Food is so cheap, supermarkets can't make any money.

For instance, at the IGA down the street from us, they get, like $8 an hour and they haven't had a raise in two years. They can't afford to pay their employees anything at all. Whereas organic chains like Whole Foods or Capers can afford much better salaires and (in the US) medical plans as well.

Also, while I agree that most systems are heading for their braking points, I believe those points are still, in a human sense, far away--like 10-20 years. Whereas oil prices have already gone way up--I remember in the 80s it was 29 cents a gallon in the states. 10x bigger in 20 years is a sizable increase. It's probably at least part of the explanation for the existence of Whole Foods in the first place; organics are cheaper now since they are more often locally grown and so shipping cost is lower.

So, no, I don't believe that rapid phase transitions like that are neccessarily going to occur. And I think that's mostly because people can really reorganize society quickly when they have to. Case in point:

http://www.fromthewilderness.com/free/w ... rea_2.html

Also, there was a report on the National a couple of nights ago about how the increased price of fuel was going to make pastics and food more expensive, and there were a bunch of retailers talking about raising prices.

I think that for a remarkable number of things, free market economies actually do a good job. The things they don't do a good job with are things that don't have a monetary value. They can respond well to shortages, but total abscences are a problem. Never underestimate the power of a free-market economy; it basically is, after all, an evolutionary maxima-finding alogorithm. Which is also why I don't trust economists; I know how evolutionary algorithms often solve problems in ways that are totally insane, and I don't think they are very predictable. Like market crashes are the system just trying to get as much numerical value as possible, until it enters a part of economic phase space that results in huge negative growth. The market doesn't care if it crashes, it just tries to maximize it's worth.

Anyways, I guess I'm trying to argue that, while I believe crashes are a part of a system, I don't believe your scenario is a plausible one for how such crashes would happen.

Posted: **24 Oct 2005, 10:46**

I think you are right , supermarkets do pressure their supply base as much as possible.

But they do monitor the financial well being of their suppliers quite closely, Tesco cannot afford NOT to have certain items in the same way some suppliers cannot do without Tescos business.

It is the same with distributors, if a company is on the verge of bankruptcy because the firm cannot pass on costs, then if the supermarket is unable to use anyone else it is in their interest to sort this out.

The question for the large supermarkets all the time is , do I stomach the extra cost OR do I risk shelves going empty?

Who are large supermarkets without their suppliers?

Posted: **24 Oct 2005, 11:29**

I tend to agree with your friend. He sees markets much as I do.

Posted: **26 Oct 2005, 12:28**

Non scientific evidence from elsewhere. I am a member of a Yahoo list called FrugalGenius where members swap ideas on saving money and getting quality for money etc.

In recent weeks several members have moved from supermarket veggie shopping to organic box schemes. A few are using national schemes, but most members have managed to find local ones and they are reporting that they are becoming very good value for money, with great service and good produce.

In my area there is a farm van that comes around every Saturday selling a limited range of produce mainly potatoes and eggs, over the last month or so the range has expanded into fruit, apples, oranges, pears and plums, but also I now see more people using the service. The man who runs it is kind enough to give me his unwanted cardboard boxes for my fire, usually I get one or two but in the last few weeks it's been 5 or 6.

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Relationship between Food Prices and Oil Prices

Relationship between Food Prices and Oil Prices

Re: Relationship between Food Prices and Oil Prices