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New study highlights impact of price changes on demand for key foods 21 Oct 2011

A new study from the Rural Industries Research and Development Corporation has revealed the foods that consumers are willing to pay more for in order to keep them as a part of their diet.

The study looked at ‘demand elasticities’ in Australia for 15 food categories and is the most comprehensive ever done in the field. The degree to which a product’s demand or supply reacts to a change in price is known as its ‘elasticity’.

The study found that milk, bread, fresh fruit and fresh vegetables face an inelastic demand, meaning that consumers are more likely to absorb a price increase to continue purchasing these products. All meat types, rice, margarine and preserved vegetables had elastic demand, meaning consumers aren’t as willing to pay an increased price to keep these goods in their fridge or kitchen cupboard.

Normally, sales increase with a drop in prices and decrease with a rise in prices, however elasticity varies among foods because some may be more essential to the consumer.

RIRDC Managing Director, Craig Burns said that in order to calculate the demand elasticities for the 15 key food groups a comprehensive analysis of food prices between 1998/99 and 2003/04 was conducted, and it showed a major increase in food prices over that five year period.

“Across the 15 food categories that were looked at, average food prices in Australia rose by 26 percent, which is well above the 17 percent increase in the CPI over the same five year period. The largest increase in food prices was seen in mutton and lamb, with a 64 percent increase, while the lowest increase in prices was in sugar and jam with a 3.6 percent increase,” Mr Burns said.

 “The study also found that when compared to other nations our inelastic demand for bread, milk and especially fresh vegetables was close to that seen in the USA, Canada and Japan. However, Australian meat demand appeared to be uniformly more elastic than that seen in other countries, meaning people overseas are more likely than Aussies to keep buying a particular type of meat if its price rises - Aussies are more likely to reduce the amount of meat purchased or substitute one meat type for another if the price of their preferred choice goes up.”

As a result of the research there is now a thorough and well defined reference source that will allow market and policy analysts to make better informed strategic decisions.

“Because food expenditure is such a crucial part of total household expenditure, being able to evaluate a consumer’s response to policies that impact on the financial wellbeing of their household is important. This research will help greatly in determining the impact of food-related policies on average Australians,” Mr Burns said.

“Up till now this detailed level of information hasn’t been available, so those that set R&D priorities, forecast future market conditions and assess proposals for industry or commodity-based levies now have a reliable set of figures to help guide their decision making process.” 

The study, conducted for RIRDC by Deakin University, used data from the most recent Australian Bureau of Statistics Household Expenditure Surveys and involved the latest estimation techniques.