Spain Food and Drink Report Q2 2008

Food price inflation in Spain is currently the highest in the Eurozone; according to Eurostat figures, between 2005 and February 2008 food prices leapt by 13%. In addition, the latest Agriculture Ministry estimates suggest that in the 12 months to February 2008, milk prices rose by 24% and chicken prices by 16%. Spanish consumers spend a fairly large percentage of their income on food and therefore food has a heavier weighting in the country's overall measure of inflation than in most other Eurozone countries.

This fact has helped push the country's official inflation rate close to 4.4% - the highest level for ten years and well above the European Central Bank's (ECB) target of 2%.

Spain is particularly vulnerable to rising commodity prices because it is a net importer of grain. Spain's lack of grazing land means that many meat and dairy farmers have to rely on expensive animal feed produced from grain. However, the Spanish climate means that local farmers cannot produce enough grain to fulfil domestic demand and the country therefore relies heavily on imports for both animal feed and food manufacture. In the coming year, this is likely to be exacerbated by 2007/2008 winter being the driest in living memory. Much of the country's farmland relies on irrigation from the national water supply and if this is not replenished in the spring of 2008, this year's harvests look likely to be very poor as meeting domestic water demand becomes the priority.

The high price of grain has pushed up the retail price of meat, milk and bread but the financial results of Ebro Puleva, the country's largest food firm, suggest that manufacturers are also bearing some of the brunt of the cost increases. In February 2008 Ebro announced that despite a 9.4% increase in net sales the firm's profits for 2007 had slumped by 50%. When announcing its results the firm commented that rising cereal prices, including animal feed prices, were having a direct effect on the bottom line. This pattern is likely to be repeated across many of the country's dairy and meat producers. In addition with the price of meat and dairy increasing so sharply consumption may soon start fall, particularly if the long predicted economic slowdown really starts to take hold.

Despite financial results that suggest that many food producers are doing a lot to moderate the severity of price increases rising food prices have become an increasingly salient political issue. The Spanish consumers' Union, UCE, suggests that retailers are using rising commodity costs as an excuse to increase their margins and the strong results from many of the country's retailers, including Carrefour, suggest that the country's retailers are certainly not being adversely affected by the situation.