Rate rise squeezes food manufacturers

The latest report from RaboResearch has found impact from the Reserve Bank’s fifth interest rate rise this year on the food and beverage sector is weakening demand, raising input costs and splintering food inflation by category.

The RBA lifted the cash rate by 25 basis points to 4.85 per cent on 3 November, after the latest ABS data showed headline inflation accelerated to 4.3 per cent in the year to September, from 4 per cent in August. Underlying inflation is running at 3.6 per cent, above the bank’s two to three per cent target band.

Food and non-alcoholic beverage prices rose 3.2 per cent, below the headline rate but up from 3 per cent in August.

RaboResearch senior food analyst, Michael Harvey, said, “Rather than broad-based inflation across the supermarket basket, we’re now seeing much greater divergence between categories.”

Food prices, year to September 2026

Source: ABS monthly CPI, via RaboResearch.

Proteins pull apart

While price increases have slowed sharply for beef, it remains the main protein hotspot. Beef and veal prices were 5.8 per cent higher year-on-year in September, down from a peak of 13.5 per cent in February. Pork prices fell 1.3 per cent, a second consecutive month of deflation, and poultry rose just 0.4 per cent.

“As household budgets remain under pressure, relative price differences provide a stronger incentive for shoppers to substitute between proteins and seek better value,” Harvey said.

Dairy prices rose 3.5 per cent, led by liquid milk at 5.4 per cent. Cheese inflation of 1.8 per cent reflects softer global cheese markets, Harvey said. Fruit prices rose 10.2 per cent, while coffee, tea and cocoa prices fell one per cent.

Harvey said consumers are holding grocery volumes but shopping hard on value. ANZ-Roy Morgan Consumer Confidence was 67.9 in late October, down 17.9 points on a year earlier. In its latest trading update, Woolworths reported Australian Food comparable sales up 6.1 per cent on strong volume growth, with average prices down 0.7 per cent and own and exclusive brands up 8.5 per cent.

“Grocery spending continues to prove resilient, but price investment, private label and promotional value are becoming increasingly important in determining where that spending goes,” he said.

Demand and costs hit manufacturers

For manufacturers, October brought a sharp deterioration. The Ai Group Australian PMI fell 13.4 points to -20.1, reversing September’s gains. The food and beverage index dropped 28 points to -13.6. On a trend basis, the food and beverage index has been stable at around -10 for the past year.

Food and beverage businesses cited weaker demand due to low confidence, delays to some inputs and rising freight costs, though some reported stronger sales from new product releases, online growth and the pre-Christmas lift.

Across all industries surveyed, input costs had the largest negative impact in October, with 29 per cent of respondents reporting higher costs for energy, fuel, freight, raw materials and resin. Some said price-sensitive customers and cheaper imports made those costs hard to pass on.

Demand impacts jumped to 20 per cent from eight per cent in September, and supply chain issues rose to 14 per cent as conflict in the Middle East disrupted shipping.

RSM Australia national manufacturing leader, Ross Dixon, said turnover was holding steady for manufacturers, but profit was not.

The ABS Producer Price Index showed a 1.3 per cent fall in manufacturing output prices, but Dixon said that was heavily influenced by petroleum and coal products and followed a 2.2 per cent increase in June.

“Energy is still the single biggest structural cost issue for our clients, particularly gas- and electricity-intensive processes in food, metals and plastics.

“Manufacturers are responding by shortening contract validity periods and building energy escalation clauses into supply agreements, which erodes competitiveness against imported product,” Dixon said.

He said food processing was one of three areas, with defence and infrastructure, still generating optimism in the sector. But he warned cash conversion was slowing, with debtors stretching and inventory sitting longer. Conventional capex, training and R&D were also being deferred.

RSM is calling for an accelerated write-off for automation and digitisation capex, a training or skilled migration incentive for trades and technical roles, and an official industrial electricity price index.

Productivity and labour

The Australian Food and Grocery Council (AFGC) said lifting productivity was critical to easing inflation and creating conditions for investment, as higher rates add pressure on businesses and households.

AFGC CEO, Colm Maguire, said, “We need policy settings that make Australia a better place to invest. That means lifting productivity, cutting unnecessary regulatory duplication and supporting businesses to put capital into productive assets.”

In its submission to the Productivity Commission, the AFGC proposed removing duplicated non-financial reporting requirements, allowing information to be reused across government, and a government-wide roadmap for reporting requirements and timing.

The National Farmers’ Federation (NFF) used the decision to target the government’s proposed caps on Working Holiday Maker visas at 45,000 for second-year and 5000 for third-year visas, against around 57,000 and 31,000 who qualified last year.

The NFF estimates up to 38,000 fewer experienced workers could progress through the program, representing at least 5.7 million days of regional farm work.

NFF CEO, Michael Guerin, said, “In horticulture, labour can account for up to 60 per cent of the cost of production. At exactly the time households need downward pressure on their grocery bills, the Government is proposing to artificially constrain one of the most important sources of seasonal farm labour.”

Harvey said there were encouraging signs in global commodity markets, but weather, energy prices and geopolitical uncertainty remain key risks heading into 2027.