Raw material costs, not GST hike, behind higher prices of groceries

By Derrick A Paulo, TODAY
18 May 2007 1051 hrs

SINGAPORE: If you feel like you have been paying more for groceries in recent weeks, you are spot on — though perhaps not for the reason you might think.

From milk to Milo, cooking oil to coffee, canned foods, processed foods, wheat products and more, prices have been rising recently at supermarkets and hypermarts here.

Retail operators told TODAY that, since late last month, more food items have been affected. And it has set some shoppers wondering if profiteering is happening even before the Goods and Services Tax (GST) hike, from 5 to 7 per cent, kicks in in July.

Irked reader Joyce Ong told TODAY: “The GST hike has not yet been implemented, but the price of Nestle Carnation evaporated milk and Milkmaid condensed milk has already been increased from $1.10 to $1.60 ... Besides starting too early, isn’t the increase too drastic?”

Online, price increases are being compared on Internet chat forums, with many netizens attributing the inflation to the impending GST hike.

But various food suppliers told TODAY the higher tax has nothing to do with it. They blame the “tremendous cost increases” in raw materials for their moves to increase prices.

Cost pressures for dairy products, especially milk, are increasing worldwide, and especially in Asia and Africa as the supplies come from elsewhere. Demand in Asia is also rapidly increasing.

Bloomberg reported this week that China would increase demand by as much as 15 per cent annually for the next three years. This has “aggravated the situation”, Nestle Singapore communications and corporate affairs manager James Wong told TODAY.

Various factors have come together to create, virtually, a perfect storm, said analysts.

Australia has reduced milk exports because of its worst drought in a century. Reduced subsidies, meanwhile, have eliminated milk surpluses in Europe and slowed growth in its production in the United States.

Fuel and feed costs are affecting farmers, who may choose not to expand their herds.

All the food suppliers TODAY spoke to stressed that they are not passing on the full increase to consumers in Singapore. Mr Kenneth Low, assistant general supplies Magnolia products, said the recommended retail price of its fresh and pasteurised milk products were adjusted from May 4.

“F&N has absorbed a significant portion of the increased cost (of milk),” he said.

The prices of key ingredients in Milo have all increased, said Nestle’s Mr Wong. The price of skimmed milk powder went up 112 per cent year-on-year last month, cocoa prices rose 12 per cent “due to world supply”, and palm oil shortages jacked up prices by almost 40 per cent.

“We have increased our coffee prices by an average of 6 to 9 per cent, and Milo products by an average of 5.2 per cent,” he said. “Increasing world demand has pushed up Nescafe prices by almost 17 per cent. In fact, through increased efficiency in production, we have managed to lessen the burden of price increases as well as delay the price increase to consumers.”

Currency changes have also caused food prices here to go up. Del Monte Asia, which supplies processed foods here, buys and sells its products in US dollars. But the latter has depreciated and production costs are still in local currencies, said Del Monte Asia marketing director Catherine Chang.

“Our peaches, for example, come from South Africa where the rand has appreciated. So, prices have increased 6 to 8 per cent,” she said.

Supermarkets like Sheng Siong say they are doing their part to help consumers. Purchaser Alan Chan said the retailer is holding out against pressure from suppliers to increase the price of instant noodles.

NTUC FairPrice, which has promised to absorb the GST hike for a range of essential items, is mindful of its social role in the current scenario, said its director of integrated purchasing, Mrs Teo Poh Yim.

“When suppliers come to us with recommendations to raise prices, we always seek justification from them. We ourselves have to be convinced,” she said.

“Where possible, we want to be the last to adjust prices. For example, the cost price and recommended retail price for a particular brand of kaya increased, but we decided to sell it 10 cents below this price.

“Another supplier had increased the price for a brand of canned mushrooms in mid-March, from $1.20 to $1.30. We continued to sell it at $1.20 until April 27.” - TODAY/fa