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Pasta producers in hot water over soaring prices (FT)

25 June 2023

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Financial Times title: Pasta producers in hot water over soaring prices
FT subtitle: Brands including Barilla and Panzani in tussle with EU governments as mark-ups continue despite lower wheat prices
By: Madeleine SpeedSilvia Sciorilli BorrelliLaura Onita and Eri Sugiura
Date: 21 June 2023

“European pasta producers are facing growing pressure to lower prices as simmering tensions surrounding the rising cost of fusilli, spaghetti and other household staples threaten to boil over.

Italian consumer groups have asked competition authorities to look into the possibility of price collusion and called for shoppers to shun products in a “pasta strike”, while the French government has threatened food producers with financial sanctions if they do not lower prices.

The rise in pasta prices is far outpacing broader inflation in parts of the region and has continued despite a sharp drop in the cost of the wheat used to make it.

Manufacturers, which include Barilla, De Cecco and La Molisana in Italy and Panzani in France, insist that their pasta is priced fairly, with recent rises reflecting the impact of higher manufacturing and other input costs following Russia’s invasion of Ukraine.

But they have been accused of profiteering and “greedflation” as shoppers wonder why they are still paying so much.

“Reality is far different from [the manufacturers’] narrative,” said Italian consumer group Codacons. “Year-on-year price hikes measured on a monthly basis are two times the current rate of inflation.”

Note LO: see FT article for diagram on: Pasta prices have soared across Europe

Although broader inflation has eased in the past few months, the price of a kilogramme of pasta in Italy was still up 14 per cent year on year in May, against 15.7 per cent in April and 17.5 per cent in March, official statistics show. Italians are the world’s biggest pasta eaters, consuming roughly 23kg a year, according to the International Pasta Organisation industry body.

“For Italian families it’s a fairly existential crisis,” said Clive Black, an analyst at Shore Capital.

The picture is similar elsewhere in Europe. Pasta price inflation in April hit 27.6 per cent in the UK, 21.8 per cent in Germany and 21.4 per cent in France, according to UK and EU data.

Pasta consumed in Europe is made primarily from Canadian durum wheat imported largely to Italy, the world’s biggest producer.

Extreme heat and drought in Canada in 2021 led to a sharp drop in production and sent the price soaring. It has been decreasing steadily since December that year but rose slightly this month after the collapse of Ukraine’s Kakhovka dam hit global wheat markets, according to commodities research group Mintec. Although down more than 40 per cent from its peak, the price of Canadian durum remains 18.8 per cent higher than in June 2021, before the price spike.

Facing accusations of using inflation as a cover to raise prices, pasta makers point out that wheat is only one of many volatile costs throughout their products’ journey from field to plate.

Note LO: see FT article for diagram on: Durum wheat prices remain higher than the levels just prior to their 2021 peak

Luigi Cristiano Laurenza, general secretary of trade body Unione Italian Food Pasta, said the industry was still contending with higher energy, logistics and packaging costs following Russia’s invasion of Ukraine and that it would take some time before falling wheat prices fed through to shoppers.

“The effects of production costs on products are never immediate,” he said. “If the current trend of cost contraction continues for a protracted period, we could even see a reduction of consumer prices.”

One factor for the lag is the length of time it takes for wheat purchased at higher prices to be used up, with current prices reflecting those contracts.

“Prices are still high because companies are still using up the stocks of wheat they bought at peak price,” said Giuseppe Ferro, chief executive of La Molisana, Italy’s fourth-largest pasta maker. “Once that is finished in three or four months, prices will drop.”

David Ortega, a food economist and associate professor at Michigan State university, said food prices tended to be sticky given the range of costs beyond those of their basic ingredients.

“They rise very fast when there is a shock and then they take longer to come down,” he said. “We see the price of commodities like wheat come down quite substantially. But wages are still up, and some of the raw materials for packaging and others are still high.”

The discrepancy between the cost of wheat and the eventual sticker price goes to the heart of a tussle playing out among food groups, retailers and politicians.

With food prices having overtaken energy as the primary driver of inflation across Europe, producers are under particular pressure to lower them after groups such as Nestlé, Unilever and PepsiCo reported healthy quarterly earnings, having passed on higher costs to consumers.

Italy’s industry minister Adolfo Urso convened a crisis meeting of pasta producers, distributors and associations last month after the unexpected jump in prices triggered calls from consumers for a price cap. But officials decided not to intervene and assured the public that the market would soon correct itself as energy and raw material costs continued to decline.

Codacons has since reported pasta makers to Italy’s competition authority, urging it to investigate whether companies might have colluded to manipulate prices. Meanwhile, Assoutenti, another consumer group, has called for a week-long “pasta strike” starting next week, urging shoppers not to buy the product but to make it at home themselves.

France’s finance minister Bruno Le Maire last month threatened to use tax measures to claw back profits if the sector refused to reopen price negotiations with retailers.

Speaking to a French radio station at the time, the president of French supermarket operator Leclerc, Michel-Edouard Leclerc, said pasta price increases were inexplicable, accusing food manufacturers of a lack of transparency and “hiding behind the war in Ukraine”.

Le Maire said this month that 75 food producers had pledged to lower prices by July, in line with falling wholesale costs.

Note LO: see FT article for diagram on: Pasta prices have risen sharply across Europe since the start of the war in Ukraine

In the UK, government plans to encourage supermarkets to voluntarily cap the price of food staples provoked a backlash from retailers and even Conservative MPs. The government has rejected calls for an investigation into “profiteering” by supermarkets, but the UK’s competition watchdog has said it will scrutinise supermarket fuel pricing and the groceries market more closely.

The country’s Food and Drink Federation said its members were cutting costs wherever possible and turning to price rises “only as a last resort”.

De Cecco, Barilla and Panzani, which manufactures its pasta from wheat grown in France and has pledged to lower its prices on July 1, declined to comment.

Beyond the recent agreement in France, there are early indications of moderation in some parts of the market, such as big supermarkets’ cheaper lines of own-brand pasta.

Yet, overall, manufacturers are giving little sign that they will lower prices.

Ortega said the pressure from grocers on food producers was likely to continue. “But I don’t think they’re going to particularly lead to a lot of action,” he said. “The increase in prices are because of an increase in costs all along the supply chain.” “


Note FT: Additional reporting by Adrienne Klasa


Source:
https://www.ft.com/content/e9870f4e-da53-45b1-92ae-82cdf17f5f95

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