Key points
  • Food analyst says "systemic increase" in production costs caused grocery price inflation of past few years.
  • Coles and Woolworths have been accused of price gouging by the ACCC.
  • Rabobank analyst says more expensive fuel, labour, fertiliser and other input costs contributed to food price surges.

Rabobank Senior Food Analyst Michael Harvey told the Savings Tip Jar podcast his research has found a "significant margin squeeze" on the food production process.

"We looked at the last couple of years, and you can do this in terms of looking at margin performance across the supply chain, or the value train and the profit pool, and I certainly see evidence enough to suggest there was a significant margin squeeze downstream," he said.

Mr Harvey was asked about accusations that Coles and Woolworths have been hiking up prices to increase profits, and instead pointed out how the economic turmoil over the past few years has made it more expensive to produce food on a farm.

"You had a spike in commodity prices...food prices rose, there was labour availability shortages, fertilizer prices jumped dramatically, interest rates moved higher," he told the podcast.

"There's also significant cost inflation downstream in food manufacturing and food retailing, starting at conversion costs or processing costs, the cost of packaging, the cost of distribution, wage inflation came through."

An ACCC report earlier in the year found Coles and Woolworths have an "apparent ability to increase margins for packaged grocery products by more than is necessary to accommodate a wholesale price increase".

However Coles hit back, claiming that ACCC analysis of their margins excludes costs like energy, rent and wages, which have all increased significantly over the past couple of years.

Mr Harvey says there's evidence that suggests food companies and retailers' EBIT (earnings before interest and taxes) is still below pre-pandemic levels.

"Food companies or the retailers, they took a hit through the pandemic and through the spike in in the cost of producing food and distributing it, they're in recovery mode," he said.

He believes there's "a lot of nuance" to why grocery prices are so high now.

"It comes back to that story, this was a systemic increase in the cost of production across the food eco-system, and that's why consumers are paying a lot more for food," he said.

Are food prices stable now?

Grocery shopping has been where many Australians have felt the effects of inflation the hardest over the past few years.

The ABS Consumer Price Index (CPI) has consistently shown food prices rising significantly, peaking at 9.2% inflation over the 12 months to December '22.

As many shoppers will be familiar with, the cost of some items has well exceeded that - take avocados for example which were 98% more expensive in December 2024 compared to a year prior according to the Savings.com.au Grocery Price Index.

However Mr Harvey told the podcast that fresh produce is historically a volatile aspect of the overall cost of groceries.

Coffee, olive oil and eggs are other examples of goods now dramatically more expensive than just a couple of years ago; weak yields in South America are the culprit for the former, and bird flu is the culprit for the latter.

The most recent price data does suggest things are moderating, with Mr Harvey calling food inflation "a much more normal pricing environment".

"[Quarterly inflation in June] was much more aligned to the long term trend around what food inflation runs at," he said.

He said there were some trends in global markets that could mean more future spikes for some grocery products.

"You've got very high global butter prices at the moment...there could be more upward movement on [butter prices] at the consumer shelf as well."

He said a major way consumers are responding - with more people in the 'price sensitive' demographic - is through specifically shopping for discounts and at cut-price retailers like Aldi.