Chinese processors struggle against rising costs

Rising food and beverage prices have been blamed for China's Consumer Price Index hitting a seven year high of 3.8 per cent. Food manufacturers say that rising grain and power costs are the reasons for the hikes, as economists warn that the economy may be overheating.Grain harvests have dropped globally for the past five years, and with 1.3 billion mouths to feed and the added impetus of rising power prices, the impact is being felt particularly hard by China's food and beverage manufacturers, who say they have no alternative but to pass on grain and utility price hikes.

According to the CPI, food prices increased by 10.2 per cent in April, compared to 7.9 per cent a month earlier, with the average cost of grains increasing by 33.9 per cent, vegetable oils up by 26 per cent, meat by 15 per cent and eggs sales rising by 19 per cent. Additionally, manufacturers have reported that average power costs are increasing at the rate of 15 per cent.

China is currently a net importer of grains. In recent years the country's ability to feed itself has been affected by encroaching deserts and aquifer depletion which has eaten heavily into its arable resources, all exacerbated by rapid population growth. The Chinese authorities can have little influence over such matters, but Beijing has tried to implement price capping for utilities companies in an effort to reduce power costs. However, economists have warned that capping measures could lead to an economic slowdown, with repercussions stretching far beyond the realms of the food industry.

One of the segments hardest hit by recent hikes has been the brewery business. At the end of last month unconfirmed rumours were circulated in the Chinese press that leading breweries were in discussions to agree to price hikes of between 10 and 20 per cent, citing rising ingredients prices as the main cause for the move.

Subsequently the beer market has experienced more modest price increases than those predicted, with breweries confirming that ingredients prices were the primary cause for the rises.

Not everyone is predicting doom and gloom for the Chinese food and beverage sector though. Some analysts believe that recent increases in ingredients prices may prove to be temporary, as many major crop harvests for this year are forecast to improve, both on a domestic and global basis. Undoubtedly much will depend on the size of those crops.