Input costs: Why food prices are skyrocketing amid cheap labour

A 3D illustration of inflation, growth of food sales, growth of market basket or consumer price index concept. [Getty Images] Inconsistent supply of raw materials from the local market and costly imports have been cited in a new report as major contributors to the high cost of food. The Kenya Economic Report 2023 published by the Kenya Institute for Public Policy Research and Analysis (Kippra) also pointed out the incapacity of micro and small enterprises (MSEs), who are the majority in the country's food processing industry. The cost of intermediate inputs where raw materials, electricity and water charges fall also play a role with the report noting labour expenses being relatively low across various food products. Grain mill processing, where maize flour is manufactured, and cooking oil are some of the food products whose intermediate input costs are high; which explains the resultant price of these items on the shelves. For instance, while labour costs for grain mill products average 2.3 per cent of total sales, input costs for the same stands at 72.0 per cent (of sales). It is the same for cooking oil whose labour costs average 3.8 per cent while input costs averaged 80.0 in 2019, 2020, and 2021. Low contribution The challenge is magnified owing to the fact that most of the businesses in this important sector are small enterprises. Kippra notes that MSEs account for 86 per cent of Kenya's food manufacturing enterprises yet their output is just 10 per cent. This low contribution has been linked to challenges related to capacity utilisation, adoption of technology and low innovation. "Enhanced capacity utilisation supports realisation of economies of scale that is expected to lower unit costs," the report says. The low contribution of MSEs, the report says, implies that there are unexploited opportunities yet to be tapped. "The MSEs face constraints in technology upgrading attributed to access to finance and skills, and low research and development investments," the report documents. These businesses also face challenges related to market access, supply of raw materials and uncertainty in the policy space. "Over 80 per cent of the food manufacturing MSEs operate in the informal sector, where they face multiple barriers related to infrastructure, access to markets, skills and compliance with health and food safety standards," the report says. The report themed, Cost of Living and the Role of Markets notes the importance of a vibrant food processing industry as key in ensuring the cost of food does not skyrocket. It states that food manufacturing cost is majorly attributed to high cost of raw materials. "Raw materials that are sourced domestically are prone to supply disruptions due to droughts, while those that are imported are prone to price changes in the international markets," the report says. As a result, food manufacturing costs affect the consumer as manufacturers reflect price changes through the producer costs. It is documented that while importation of raw materials for food manufacturing is used to bridge the local supply deficits, it is associated with high costs. "The dependence on imports creates exposure to price changes in the regional and global markets through cushioning against impacts of domestically originating constraints such as droughts that affect supply of raw materials," the report adds. Intermediate costs The state think-tank states that prices of consumer goods are affected by manufacturing costs related to labour, raw materials, electricity, water, and logistics on where to do the sourcing. From the report, intermediate input cost for food manufacturing is higher compared to labour at 67.3 per cent of sales. This is across several food products. "Labour costs as a share of sales for food manufacturing average 7.4 per cent compared to overall manufacturing at 9.0 per cent," the report says. It adds that the manufacture of cooking oils and fats, sugar and confectionery, and grain mill products has higher share of intermediate input costs compared to the average for all food manufacturing activities. "This is notable given that these products account for 9.6 per cent of the consumer consumption basket," the report says. Intermediate input costs for manufacture of cooking oils and fats averages 79.6 per cent between 2016 and 2021. For sugar and confectionery, this figure is 76.8 per cent. Grain mill products intermediate costs average 72.0 per cent. Beverages and bakery products have the lowest intermediate costs at 47.6 and 49.5 per cent. Cooking oils and fats, and sugar and confectionery, the report states, account for a substantial share of imported manufactured food products. This, Kippra explains, creates exposure to prices in the regional and international market even as it reduces exposure to domestic factors like droughts. Kippra documents that the importation of these products may be due to high costs of production attributed to input costs. "Food manufacturing has a higher intermediate input cost compared to all the manufacturing activities, for which share of this cost component averages 64.9 per cent as a proportion to sales," the report says.

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