The should cost of Panettone

Do raw material cost dynamics justify recent panettone price inflation?

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Food Should Cost Should Cost
Stampa

Panettone is the most iconic product of the Italian Christmas baking tradition. In recent years, its price has increased significantly, as highlighted by a recent analysis published by Linkiesta.it, which reports a price inflation of over +50% since 2021. In light of the sharp rise in panettone prices over recent years, it is useful to assess to what extent this increase can be explained by changes in production costs. To do so, the Should Cost methodology is applied, allowing the dynamics of key input prices to be linked to the cost of the finished product. Panettone is particularly well suited to this type of analysis, given the large number of ingredients involved in its production process (butter, eggs, candied fruit, etc.).

Building the Should Cost of Panettone

Below we describe the construction of the should cost for a one-kilogram panettone. Production costs can be broken down into three main components:

  • raw material costs;
  • energy costs;
  • other costs (labor, services, etc.).

With regard to raw material costs, the analysis considers the individual ingredients and their respective technical coefficients (i.e. the quantity of each ingredient required per unit of finished product), as shown in the table below.

Ingredient Price series
EU Customs PricePedia		 Technical
coefficient (kg per unit of panettone)		 Cost driver price
in 2022-01 (€/kg)		 Ingredient cost
January 2022 (€/kg)		 Cost share
in 2022-01 (%)
Flour Flour of common wheat and spelt 0.33 0.44 0.14 7
Butter Butter (fat content > 85%) 0.22 4.82 1.06 53
Sugar White sugar 0.16 0.50 0.08 4
Eggs (yolks) Liquid egg yolks 0.14 2.00 0.28 14
Raisins Sultanas 0.14 1.72 0.24 12
Candied fruit Peel of citrus fruit or melons 0.09 2.07 0.19 9
Milk Milk 0.05 0.50 0.03 1
Total 1.13 2.02 100

The table includes only the costs of the ingredients required to produce a one-kilogram panettone. It should be noted that the sum of ingredient weights exceeds one kilogram, as part of the liquid content is lost during baking.
The share of raw material costs amounts to 65% of the total, considering that the customs-based price of panettone in January 2022 was equal to 3.1 euros per kilogram.

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Before calculating the final should cost of panettone, the two remaining macro cost components, energy costs and other costs, must also be taken into account. These are assumed to account for 10% and 25% of total costs, respectively. As a proxy for energy costs, the Energy Index (Europe) is used, while other costs are proxied by the Harmonized Index of Consumer Prices for Euro Area, under the assumption that over time these costs tend to align with overall inflation.

Should Cost of Panettone

Based on the cost breakdown analysis described above, the following chart shows the evolution of the should cost of panettone starting from January 2007.

Should cost of panettone, Index in Euro (2022-01 = 100)
Should cost of panettone, Index in Euro (2022-01 = 100)

While over the first fourteen years the should cost of panettone increased by approximately 25%, from 2021 onwards it rose by a cumulative +62% in just five years, well above the +50% increase observed in consumer prices. This suggests that producers may have absorbed, at least partially, the cost increases experienced over this period.

Conclusions

The should cost of panettone constructed above provides a concrete example, especially for food industry, of how this methodology can be used to interpret cost dynamics. The approach is particularly valuable for finished products composed of multiple cost items and/or characterized by strong exposure to commodity price fluctuations.