In recent months, however, a turning point has begun to emerge in the direction of the prices of food products, which have been growing rapidly up to now, but, apart from dairy products, in general, no significant reduction in prices can be observed. The main problem is that it takes time for the effects of the previous increase in price to stop manifesting.
Raw material costs continue to rise
Industry experts point out that the price reduction is not as simple as it might seem, as last year’s jump in costs creates even more complications. Andrejs Ždans, the owner of the meat processing company “Forevers”, says that his company’s costs for energy resources increased fivefold last year compared to 2020. In general, such drastic changes in the prices of energy resources have affected the cost of products, and they are attributable to indirect production costs, which are the third largest cost item of the company from the total product costs, explains the businessman. According to him, even the current costs of energy resources, despite the fact that the prices are gradually approaching the level of 2021, are still considered high.
However, direct production costs, ie raw materials and labor, have the greatest impact on the cost of the product. “The mentioned cost items have grown over the last year, and in general they make up the lion’s share – about 80% of all product costs. The meat raw material is definitely the main price-influencing factor with the biggest impact on the cost of products. Unfortunately, its purchase price has not decreased in recent months, despite forecasts promising a decrease. On the contrary – the cost of raw materials continues to rise,” A. Ždans assesses.
He cites pork bacon as an example. Compared to October of last year, when the last price change was experienced, it has become more expensive by 13%. On the other hand, compared to February of last year, the price of raw meat has increased by 69%. According to A. Ždana, even small changes in the price of meat raw materials have a significant impact on the sales price of the product and, unfortunately, in most cases, one has to react by adjusting them to the actual costs of raw materials. “Considering that meat raw material, which is the cost item of the product with the most significant impact on the selling price, has increased and not decreased – no price reduction is expected on store shelves in the near future. We cannot rule out that with the approach of the summer season, when the demand for meat products increases, the prices may increase even more,” says the head of the company.
The chain reaction must be
According to the owner of egg producer “APF Holdings”, Yuri Adamovičs, it is logical that when the cost price decreases, the production should become cheaper, and this corresponds to all laws of macroeconomics. “If the cost price decreases, then it’s only a matter of time which manufacturer lowers the price in the competition. This, of course, causes a corresponding chain reaction and also forces other companies working in the specific sector or sub-sector to reduce prices,” explains the businessman.
However, according to him, it should be understood that the manufacturer cannot really influence the price that is on the store shelf. “Here the question arises for both politicians and public administration institutions, why do food products cost more in Latvia than in France, Spain, Germany or Italy? The answer is certainly not to be found on the side of the producers,” says J. Adamovičs.
The fall is slowed down by old contracts
Representatives of the food industry point out that some time must pass before the recent developments will start to have a greater impact on the prices of goods in stores. This is largely due to the pace until the real cost of the business begins to decline. When asked whether the drop in prices of raw materials on commodity exchanges has already reduced the company’s cost of production, J. Adamovičs says that this has not really happened to the company he represents. This is because the market has been completely reorganized since the war in Ukraine started.
“Often business relations had to be started anew and with new partners. Consequently, instead of the former post-payment, companies were forced to switch to pre-payment. Previously, even 30 or 60 days post-payment could be agreed with the suppliers of grain and other raw materials traded on the stock exchange, but when the war started, this whole previous system collapsed and instead of post-payment, we had to deal with advance payments,” J. Adamovičs outlines the changes in the situation
According to him, since the work took place in the conditions of a very volatile market, many companies tried to fix the prices of the supplied raw materials. “Thus, a situation has arisen where the previously fixed price is slightly higher, but in some positions even much higher than on the stock exchange, but we can’t really influence that anymore. The contracts have been concluded, and the contracted volumes must be withdrawn in full,” explains the representative of the egg producer.
Describing the time period in which prices change in production and on store shelves, A. Ždans says that in the segment of ready-made meat production, depending on the cooperation agreement concluded between the production company he represents and the large customers, namely the most popular store chains in Latvia, price changes occur on average 1-3 within months. Meanwhile, the company’s own network of meat stores changes within a week. The process of price changes is said to directly depend on the price policy and strategy created by the trader, as well as on how the manufacturer manages and controls the price issue of the manufactured products. As heard from the environment of food companies, another important aspect, why the price does not fall immediately and quickly, could be that last year, when there was a rapid increase in cost in the market stress, it was not immediately included in the price of the products.
“It is also necessary to take into account the fact that last year it was not possible to change the prices for retail chains as fast as the energy resource changes on the exchanges. With this, I want to say that probably not all the costs caused to the companies were compensated,” comments the commercial director of JSC “Hanzas maiznīcas” Beatrice Šilberga.
