Middle East Conflict: How Rising Oil Prices Could Impact NZ Food Costs

Rising oil prices, spurred by ongoing conflict in the Middle East, are poised to impact grocery bills for New Zealand consumers, though the extent of the increase will vary significantly depending on the food type. Analysis from Infometrics suggests the fishing sector is most vulnerable, with fuel costs representing around 25% of its overall input expenses. This comes as broader economic indicators suggest inflationary pressures may persist for longer than previously anticipated.

Sector Exposure: From Fishing to Farming

Gareth Kiernan, chief forecaster at Infometrics, detailed the varying degrees of exposure across different food production sectors. His assessment, reported by RNZ, focused on the proportion of each sector’s costs tied to oil-based fuels. The fishing industry tops the list, heavily reliant on diesel for its operations. Following closely is horticulture, where approximately 5% of costs are attributed to fuel – likely for heating and related processes.

Further down the chain, broader farming operations, including sheep and beef, face a 3-4% cost impact from fuel. Kiernan also highlighted the potential for increased fertiliser costs, as fertiliser production is also energy-intensive. Supermarkets themselves absorb around 10% of their non-wage costs in transportation, although meat processing facilities face similar logistical expenses. You can identify more about Gareth Kiernan’s work and expertise at Infometrics’ team page.

Beyond Domestic Production: The Impact of Global Supply Chains

The impact isn’t limited to locally produced food. Westpac chief economist Kelly Eckhold emphasized that imported goods will also be affected by increased transportation costs. “The issue is how transportation costs start going through – I guess anything that’s having to come from overseas is going to have a higher transportation component,” Eckhold stated. This is particularly relevant for commodities like cocoa beans and coffee, which travel long distances to reach New Zealand shores.

Kiernan echoed this sentiment, noting that products with extensive global supply chains are likely to experience more significant price increases. This aligns with broader concerns about supply chain vulnerabilities highlighted during the Covid-19 pandemic.

Timing and the Lag Effect

Consumers shouldn’t expect to notice immediate price hikes. Eckhold suggests a lag of several months between global price movements and changes on New Zealand supermarket shelves – roughly six months, similar to what was observed during the Covid-19 pandemic. This delay is due to existing contracts, inventory levels, and the time it takes for new costs to filter through the supply chain.

However, Eckhold anticipates that businesses may begin implementing fuel surcharges to offset rising costs. “I would envisage you could see the introduction of a whole lot of surcharges coming on to things, as people say, ‘Well hey, I’ve got this particular identifiable increased cost,’” she explained. These surcharges could appear on courier fees and other transportation-related services.

Inflationary Outlook and Supermarket Costs

The rising fuel costs contribute to a broader inflationary picture. Eckhold now expects the Consumer Price Index (CPI) to remain above 3% until the end of the year, a revision from previous forecasts. Data from Infometrics’ supplier cost index already shows a 2.3% year-on-year increase in costs to Foodstuffs supermarkets as of February – before the recent surge in oil prices fully took effect.

For context, New Zealand’s CPI measures the average change over time in the prices paid by households for a basket of consumer goods and services. The Reserve Bank of New Zealand targets a CPI range of 1-3%, making the current forecast a concern. More information on New Zealand’s CPI can be found on Stats NZ’s website.

Fuel Crisis and the Fishing Sector: A Deeper Dive

The disproportionate impact on the fishing sector warrants further attention. With 25% of input costs tied to fuel, even a modest increase in diesel prices can significantly affect profitability. This could lead to higher prices for seafood, potentially impacting consumer demand. The sector’s reliance on diesel is due to the fuel requirements of fishing vessels for both catching and transporting their catch.

The fishing industry in New Zealand is a significant contributor to the economy, generating billions of dollars in export revenue. Any disruption to this sector could have wider economic consequences. Further details on New Zealand’s fishing industry can be found at the Ministry for Primary Industries website.

Looking Ahead: Potential for Surcharges and Continued Inflation

The coming months will likely see increased scrutiny of pricing strategies across the food industry. The potential for widespread fuel surcharges, as suggested by Eckhold, could become a common feature of consumer transactions. Businesses will need to carefully balance the need to cover rising costs with the risk of alienating customers.

The situation remains fluid, dependent on geopolitical developments and global oil market dynamics. Continued monitoring of fuel prices, supply chain disruptions, and inflationary pressures will be crucial for businesses and consumers alike. Gareth Kiernan’s profile on LinkedIn can be viewed here, offering further insight into his professional background.

What to expect in the short term: Expect to see incremental price increases across a range of food products, with seafood likely to be among the first to feel the impact. Keep an eye out for the introduction of fuel surcharges on delivery and transportation services. The overall inflationary environment is expected to remain elevated for the foreseeable future.