The impacts of inflationary pressures and shortages on the UK food sector

Mintec recently evaluated the impact of inflationary pressures on the UK food service sector. To save you time and keep you informed on the current market conditions, we have provided a summary of the key points below.

 

Macroeconomics:

  • The UK’s consumer prices surged by 3.2% in the twelve months to August 2021, a record month-on-month increase and the highest inflation rate since March 2012.
  • The focus is now shifting towards soaring energy costs. Food and clothing prices are also expected to rise in the run-up to Christmas.
  • The Value Added Tax (VAT) for the hospitality sector will increase to 12.5%, from 5% applied in July 2020 to support the reopening of the economy.

 

Key Category Impacts:

Beef & Chicken
  • The UK’s natural gas price rose sharply by +585.3% y-o-y and +93.1% m-o-m in the first week of October due to a combination of supply concerns and growing demand.
  • Meat processors are concerned about the CO2 shortage as many animals will remain un-slaughtered, thus tightening market supplies. UK meat prices are likely to rise in the short- to medium- term until the production of CO2 is back to standard capacity.
  • In September, the price of chicken and beef was up 11.8% y-o-y and 10.4% y-o-y, respectively, due to low supplies.
  • Rising feed grain and oilseed prices, along with adverse weather conditions across the continent, hampered market supplies.

 

Dairy
  • UK fresh milk increased 70% since its lowest price during 2021. The limited availability of lorry drivers resulted in higher freight costs, consequently increasing the price of fresh milk in the UK.
  • Dairy companies are facing labour issues to deliver their fresh milk to customers, causing some farmers to throw away milk, while logistics firms are warning about a potential collapse in parts of the supply chain.
  • The most likely outcome of this supply chain disruption is increased production of longer shelf-life dairy products such as milk powders, which would be easier to sell once the current supply chain crisis ends.
  • Another inflationary price driver for dairy commodities is the post-Brexit trade relations. The new red tape requirement, Export Health Certificate (EHC), has hindered UK cream exports to the EU, causing the UK price trend to diverge from the EU price, with cream prices in the EU rising at a higher rate.

 

Grains
  • The gas price surge has resulted in the closure of two ammonium nitrate (commonly used fertiliser) plants in the UK, which supplies around 40% of the UK fertiliser market. As a result, the September average price of Euronext wheat increased by 18% compared to the average price in July.
  • Further limitations to fertiliser production are likely to impact the UK winter crop development and drive grain prices up.
  • As the supply chain crisis is likely to continue for some months, UK grain prices are expected to rise further on the back of higher input costs.

 

Fruit and Vegetables
  • The shortage of HGV drivers has delayed fruit and vegetable deliveries, causing the wastage of large amounts of produce. Produce such as potatoes, cabbage and cauliflower in the UK are at risk of price volatility if the shortage is not resolved in good time.
  • There is a risk that the price of products heavily imported from the EU, such as onions, tomatoes, garlic and oranges, could be elevated in the short- to medium- term as rising production cost is passed onto consumers.

 

Fish and Seafood
  • The lack of HGV drivers to transport seafood within the UK and to-and-from mainland Europe has resulted in a surplus of farmed UK seafood.
  • The price of an average-sized UK-farmed Atlantic salmon fell by GBP 1.17/kg (-19.4%) from June to September.
  • Other factors impacting the fish and seafood industry are:
    • High fuel and energy costs due to soaring crude oil and gas prices.
    • Surging oilseed and fishmeal prices leading to higher feed costs for farmed seafood.

 

Packaging
  • Packaging material prices have increased consistently, subsequently increasing overall costs across all food categories.
  • For aluminium packaging, the LME (3-month) price is up 9.6% m-o-m and 60% y-o-y in September.
  • Plastic packaging costs have increased significantly, with UK PET price rising by 44% y-o-y, and HDPE climbed by 51% y-o-y in September.
  • Strong demand has exacerbated tight supply and the packaging index is likely to stay elevated until the logistic bottlenecks and energy crisis settle.

 

Summary

Prices in most food market categories have reacted directly to the UK’s labour shortage and input cost increases. Other key factors including the sharp increase in energy prices and bottlenecks in supply chains, could mean that the growth in consumer prices remains well above the BoE target rate of 2% in Q4 2021 and into H1 2022. Some analysts predict that UK consumer price inflation will come close to 4% early next year.

Whilst inflation and shortages are out of our control, our team can help your business weather the economic turbulence with bespoke purchasing services such as:

  • Challenge all price movements
  • Benchmark against the UK-wide market
  • Seek alternatives for key lines from alternative incumbent suppliers where possible
  • Conduct best basket purchasing analysis and more

Contact us today for a free, no risk consultation.