Will inflation drive demand for seasonal and local supplies?

08 November 2017

Statistics point to input inflation running at double digit levels for many food and agri businesses and companies importing ingredients will already be feeling the pinch. The EU referendum on 23 June last year triggered an immediate fall in the pound against the Euro, and it remains around 15% down on its pre referendum value.

BREXIT STOKES INFLATIONARY PRESSURES

Overnight, this fluctuation in the currency hammered margins for food and agri firms importing ingredients and supplies from the Eurozone. Until there is more certainty on what the Brexit deal will look like, it seems unlikely the pound will strengthen.

Figures from the Office for National Statistics show that input costs for imported meat products are running at an annual inflation rate of 14%. For fish its 10% and for dairy its 11%.

If the UK walks away from the Brexit negotiations without a decent deal, this would put ongoing pressure on the value of sterling.

When the UK actually leaves the EU, there could also be a new set of tariffs and administrative complexities to negotiate.

In a briefing note (BN213) published earlier this year, the Institute for Fiscal Studies (IFS) said: “The tariff arrangements that the UK will have in place after its exit from the EU are unclear.”

It added: “Possible arrangements vary from continued membership of the EU single market and customs union, to reverting to WTO rules for governing tariffs between the UK and the post- Brexit EU.”

While the former scenario would entail no change in UK tariffs from their current level, the latter could see substantial tariffs on food imports from the EU.

Nor would the change be limited to the Eurozone as the IFS explained: “It may also entail changes in tariff arrangements between the UK and non- EU countries if the UK alters the set of existing trade arrangements it already has with non-EU countries (via the EU) or if it decides to adopt different most favoured nation (MFN) tariffs for food imports from those the EU currently imposes.”

CLEARING CUSTOMS

In addition to the financial impact on imports, there could also be a logistical aspect to consider. Whether going through road, rail or ferry terminals, the break from the EU is likely to lengthen the time taken for imports to clear customs and so increase distribution costs.

For those moving goods in chiller and/ or freezer lorries or containers, the additional time and cost could make their products less competitive and potentially impact customer demand.

Even if distributors get things running smoothly in the aftermath of Brexit, the crossover period could be an exceptionally difficult time for food and agri businesses relying on imports.

In 2015, when the French ferry operators went on strike, lorries were backed-up along the M20 for days. The Road Haulage Association said the wait ruined £21m worth of stock and similar confusion in 2019 could see businesses suffer significant losses in the short-term.

This was a point raised by the British Retail Consortium. It claimed four million trucks cross the UK’s borders each year and that annual customs declarations in the UK were estimated to rise from 55 million to 255 million from March 2019.

It said a ‘no deal’ Brexit resulting in new border controls and checks, could mean delays at ports of up to two to three days. This would force firms to re-evaluate their distribution arrangements and schedules, and necessitate significant changes at existing transport hubs that are not set up to deal with the increased level of declarations.

INFLATION BIGGER THAN BREXIT

But Brexit is not the only thing driving inflation in the food and agri sector. The international nature of supply chains means that everything from global weather patterns to trending television programmes have an impact.

The UK dairy sector has already reduced productivity in recent years on the back of a sustained period of low milk prices. Other factors have further reduced the global supply of dairy products, such as unseasonal weather during the last twelve months in New Zealand and Australia.

At the same time the Great British Bake Off has increased consumer demand for dairy products while butter has found itself more fashionable and less demonised in the media.

All of these factors, and many more, have come together to produce the inflation that the dairy market is experiencing. This is good news for butter producers but not so good for consumers, including food companies in the bakery sector who use butter as an ingredient in cakes and pastries and who will have to pass these costs on to their customers, fuelling further inflation.

Last spring an algae bloom in Chile killed 25 million salmon, accounting for around 20% of the country’s farmed salmon stock and impacting global prices.

Following wet and cold weather in Spain, courgette crops were hit and prices quadrupled during the second half of the 2016. By early 2017 they were so high that many supermarkets simply refused to stock the product and consumers had to go without.

IS MOMENTUM BUILDING BEHIND A COUNTER REVOLUTION?

The interdependent nature of global supply chains means there is very little that many businesses in the food and agri sector can do to insulate themselves completely from these inflationary market forces.

However, there may be an opportunity for UK-based companies to promote seasonal and locally sourced produce that ties in with the gastro trends publicised by chefs up and down the country.

Such suppliers could simplify international supply chains for customers and should find themselves becoming increasingly competitive given current inflation on imports. Similarly, local suppliers minimise transport costs and improve environmental performance. It is exactly these factors that have encouraged urban farmers to become more commercial, as reported on page 6.

What impact inflationary pressures have on the food and agri sector in the coming 18 to 24 months remains to be seen. But the upheaval of Brexit and increasingly inconsistent weather patterns are just two issues that will create ongoing uncertainty around pricing.

In such a price sensitive market where commercial margins are tight and consumers have limited budgets to spend, change might come about faster than we think.

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For further information, please contact Simon Lusher, Food & Agri Practice Leader on +44 20 7459 5550