Read carefully this (adapted) extract from The Economist (2011).
The consequences of costly nosh
What record food prices mean for business
HIGH prices are good for farmers. Low prices are good for consumers. “And we are in the middle,” says Alberto Weisser, the boss of Bunge, a trader of agricultural commodities. After poor harvests in Russia, Canada and Ukraine last year, a recent heatwave in Argentina and floods in Australia that wiped out much of the country’s wheat crop, everyone is grappling with pricey food.
According to the UN’s Food and Agriculture Organisation (FAO), food prices last month surpassed their previous high in 2008. “The situation is not rosy, but there is no reason for panic-buying,” says Abdolreza Abbassian at the FAO.
Russian, Canadian and Ukrainian farmers had a tough year in 2010, but other farmers are chortling. High prices put cash in their pockets and give them an incentive to plant more crops. As barley production in Russia slumped, the production of sorghum in Sierra Leone and Ghana surged. International brewers such as Heineken have started to experiment with sorghum beer, a cheaper brew that is strangely popular in Africa and China.
High food prices fatten traders, too. America’s Cargill, the world’s biggest trader of raw foodstuffs, tripled its profits in the second quarter of its fiscal year. On January 19th the privately owned firm announced that it will sell its stake in Mosaic, a fertiliser business, in a deal worth $24 billion. This will allow Cargill to stay private, after family shareholders eager to cash out had put pressure on it to float.
For makers of processed nosh, costly raw materials are a problem. ConAgra, General Mills, Kellogg’s and Kraft recently raised prices for many of their wares. In December ConAgra, which makes Slim Jim meat snacks, among other delicacies, reported a 16% decline in second-quarter profits. Like other food makers, ConAgra is experimenting with smaller packages sold at the same price.
Switzerland’s Nestlé, the world’s biggest food firm, is not yet worried. “We welcome higher prices, because they are an added incentive for farmers to produce what we need,” says Robin Tickle, a Nestlé spokesman. The cost of milk, cocoa, coffee and sugar, Nestlé’s main ingredients, account for only 12% of sales. The company protects itself against short-term volatility by using forward contracts and by buying directly from farmers with whom the firm has a long-term relationship.
For retailers food inflation is “moderately good”, says Christopher Hogbin at Bernstein Research. Their share price tends to rise as investors expect higher margins. Commodity-price rises are usually passed on to consumers only after a six-month lag, thanks to forward-buying by food-makers. Food prices will rise by 6.6% this year in Britain, Bernstein forecasts, having risen by 3.1% last year.
Grocery shoppers will react by buying more discounted items and more private-label products, which are 30-50% cheaper than branded goods. They will also buy cheap chicken rather than dear beef, potatoes rather than mange tout and plain milk rather than fancy yogurt concoctions.
Private-label makers will sell more, but since raw materials are a higher proportion of their total costs (they don’t advertise as much as posh brands), they will suffer. Most will lose more than they gain from food-price inflation. If it continues, they will have to raise their prices too. But Mr Weisser is optimistic that supply bottlenecks will soon ease. “Next year prices will come down,” he says. “Farmers have so many incentives to plant more.”
PART A: Using the above text as a starting point and applying the ideas and concepts you have encountered in the module, in no more than 2000 words altogether, answer each of the following three questions, based on the ideas in the case study. (The suggestion is that you write around 600 to 700 words on each question as each question carries equal marks).
Q1) What have been the main supply and demand factors which have affected food prices during 2010 and 2011. (Please write around 600-700 words for this question). (Please provide graphs for this question).
Q2) With reference to one specific agricultural economy of your choice examine, in detail, the specific forces which have dictated prices during the last few years. (Please write around 600- 700 words for this question). (Please provide related graphs for this question).
Q3) What are the effects of rising food prices on consumers and governments and briefly explain what governments are doing to control prices and the effects on their economies. (Please write around 600- 700 words for this question).
(Total word limit for PART A will be 2000 words).
Part B: Answer the questions shown below:
Q1) You are a market analyst specialising in the oil industry and have been asked to forecast the likely price of oil in 2011. Carefully explain the reasons behind the forecast you make. (Please write at least 885 words for this question). (Please provide graphs for this question).
Q2) Use the ideas and theories you have encountered in your study of the macroeconomic business environment to assess the possible impacts on the UK of holding the Olympic Games in London in 2012. (Please write at least 875 words for this 890 words for this question). (Please provide graphs for this question)
Q3) Why do some observers criticise companies that have monopoly power in a market while others argue that such power can be beneficial to consumer interests? Then, with reference to a country of your choice, briefly discuss the ways in which the government of that country has introduced specific policies to counteract the abuses of monopoly power. (Please write at least 915 words for this part).
Note: there must be at least 30 sources for this essay. At least 7 sources must be from BOOKS. Also, please put one (No more) quotation in this assignment and do not forget to do citations.
Note: Please do not use Wikipedia.
Note: when you give statement of someone or an institute please provide full name and define profile of that person or that institute (example: do not say Porter says that marketing is important. Instead of it, Philip Kotler who is a known professor says that marketing is important).
Note: Please use updates sources which mean ‘published sources in recent years. I mean do not use a material which is quite old.
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