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Falling oil prices ripple through economy

More affordable fuel makes more affordable food. 

The world economy is a supply chain driven by fuel. Cheaper energy means falling prices for non-related commodities in the food supply chain as input costs fall and margins spread.

“The size of the drop in oil prices combined with the already significantly lowered agri-commodities will place substantial downward pressure on global food prices, possibly reaching multiyear lows,” explained Rabobank analyst Clara van der Elst. According to the Rabo analysis, where oil and gas prices are linked, industries with high gas consumption, such as horticulture, milk powder, coffee, potato processing and beer production, costs are likely to be lowered and margins improved, at least initially. Some of the upside will eventually be passed downstream in the value chain, initially to processors, then to retailers and finally—driven by competition—to the consumer.

More affordable fuel means an expanded transportation radius for fresh food. In Rabobank’s opinion, the most affected sectors from a cost or competition perspective are likely to be wild catch seafood, biofuels and horticulture. Food is relatively inelastic, so lower food prices will drive up volumes mostly for upmarket food and drink and in developing regions, where food is a bigger part of household spending.

In first-quarter 2015 analysis, Moody’s Investor Service said that industries for which fuel is a direct and significant cost will see a positive effect from lower oil prices, as will consumer dependent businesses more generally, since lower gasoline prices mean consumers will have more cash to spend on other items. But oil and gas exploration and production companies, and the companies that supply them, will be hurt by lower crude prices. That’s something that will affect Great Plains and adjacent states more directly than non-petroleum-producing areas.

Moody’s revised assumptions for average spot prices for Brent crude are $55 per barrel through 2015, to $65 per barrel in 2016 and to $80 in the medium term, and for WTI crude to $52 per barrel in 2015, to $62 per barrel in 2016 and to $75 in the medium term.

Moody’s said sustained lower prices will also boost the margins of processed food manufacturers such as Nestlé, Mondelez International and Kraft Foods, which spend 10 to 15 percent of the cost of goods on freight and fuel. These companies should also see sales increase as cheaper oil leads consumers to spend their extra cash on discretionary food items. Restaurants will likely benefit for the same reason, though not as dramatically. Quick-service outlets such as McDonald’s and Wendy’s usually benefit from lower-income consumers, who tend to see the biggest increase in their disposable income when gas prices are low.

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