Thomas Lyons 
Last week in Ireland was marked by two significant events: The Irish government putting pressure on retailers to decrease grocery prices and the announcement of a sovereign wealth fund to manage predicted budget surpluses. The government’s intervention in private retailers’ pricing strategy is an extraordinary move that reeks of political populism. The Labour Party is even suggesting a windfall tax on retailers. This move is a clear indication that the government is trying to curry favor with the voting public. However, the rest of the Dáil seems to be following suit, so why not join in? It appears that the government’s response to the pandemic has changed the ground rules on involvement in our lives.
The food supply chain comprises three components: the primary producer or farmer, the manufacturer or processor in the middle, and the consumer-facing retailer. Although there are wholesalers and distributors, these are the three essential components. It is not publicly available what margins the retail grocery multiples are earning. We will get some information on what the processors are doing, but there is plenty available on the primary producer.
The latest consumer price inflation data shows that food prices increased by 0.6% in April and by 13.1% over the past year. Between January 2021 and April 2023, average consumer food prices have increased by 18.4%. Vegetable prices are up by 13.2%, and milk prices are up by over 35%. Agricultural input prices have increased by 51.7%, with energy costs up by 62%, electricity costs up by over 99%, and fertiliser prices up by 181.6%. It has been evident for the past 15 months that food-price inflation would become a thing here, as it has in most countries. Ireland is not unique.
Food prices have increased for valid reasons over the past couple of years, following a couple of decades of price compression due to cheap food imports and intense retail competition as the market share of the discounters has grown. Primary producers need to be considered, as witnessed by the demise of horticulture in Ireland over the past decade. This is a salutary tale. The good news for consumers is that global energy and food commodity prices are falling, and this will likely result in lower food prices for consumers over the coming months. The government will undoubtedly take credit, but it would be better to focus more on energy companies and less on grocery multiples.
Finance Minister Michael McGrath announced the establishment of a sovereign wealth fund. It is unclear why a second fund, with its associated costs, is being established when we already have a reserve fund that the government has invested €6bn in since last September. Regardless, the fund will now be created to address the expected exchequer surpluses in the coming years. The government has three options for the surpluses: spend some of it on housing, health, and other serious challenges facing the country; buy back debt and reduce the €226bn debt; or put the money into an investment fund. While spending more on housing and health has an appeal, we need to ensure that the money is spent wisely. On paying down debt, the equation is simple. If the fund can deliver higher returns than the average cost of debt servicing, then investing would make more sense and vice-versa. However, a properly managed fund could deliver higher returns. The legal structure of the fund will be critical because we know what happened to the last fund during the banking crisis.
In conclusion, the Irish government’s intervention in private retailers’ pricing strategy is a move that smacks of political populism. The food supply chain comprises three components: the primary producer or farmer, the manufacturer or processor in the middle, and the consumer-facing retailer. It is not publicly available what margins the retail grocery multiples are earning. We will get some information on what the processors are doing, but there is plenty available on the primary producer. The latest consumer price inflation data shows that food prices increased by 0.6% in April and by 13.1% over the past year. Between January 2021 and April 2023, average consumer food prices have increased by 18.4%. Vegetable prices are up by 13.2%, and milk prices are up by over 35%. Agricultural input prices have increased by 51.7%, with energy costs up by 62%, electricity costs up by over 99%, and fertiliser prices up by 181.6%. It has been evident for the past 15 months that food-price inflation would become a thing here, as it has in most countries. Ireland is not unique.
The good news for consumers is that global energy and food commodity prices are falling, and this will likely result in lower food prices for consumers over the coming months. The government will undoubtedly take credit, but it would be better to focus more on energy companies and less on grocery multiples. Finance Minister Michael McGrath announced the establishment of a sovereign wealth fund. It is unclear why a second fund, with its associated costs, is being established when we already have a reserve fund that the government has invested €6bn in since last September. Regardless, the fund will now be created to address the expected exchequer surpluses in the coming years.
The government has three options for the surpluses: spend some of it on housing, health, and other serious challenges facing the country; buy back debt and reduce the €226bn debt; or put the money into an investment fund. While spending more on housing and health has an appeal, we need to ensure that the money is spent wisely. On paying down debt, the equation is simple. If the fund can deliver higher returns than the average cost of debt servicing, then investing would make more sense and vice-versa. However, a properly managed fund could deliver higher returns. The legal structure of the fund will be critical because we know what happened to the last fund during the banking crisis.
