Evaluating the impact of inflationary pressures on the UK food sector

October 20, 2021

16 mins read

 

Introduction

The UK food commodities supply chain continues to experience shortages due to a lack of domestic truck drivers and slowing deliveries from the EU. The situation came into the limelight in early May 2021 and has escalated through Q3 2021 and into Q4 2021, with the UK's Road Haulage Association (RHA) citing 'a freight and haulage crisis'. Some of the driver shortages are attributed to the COVID-19 pandemic, particularly among drivers from Eastern Europe that comprise a large part of the UK Heavy Goods Vehicle (HGV) driver population. Many drivers returned to their native countries during the initial wave of COVID-19 in Q1 2020 and are yet to travel back to the UK, thus lessening the availability pool. This fuelled net driver outflows from the UK, with those leaving the trucking industry at a faster rate than newly qualified drivers. The UK alone has cancelled approximately 28,000 HGV driver tests since March 2020, according to the RHA.

More recently, the Driver and Vehicle Licensing Agency (DVLA) highlighted concerns over the backlog of HGV licenses to process, resulting from staff strikes following health concerns and home working. The backlog prevents the approval of new workers, which could exacerbate the shortage over the longer term. The government is considering ways to relieve pressure and deploying the army to alleviate the driver shortage in the UK.

Brexit is also a factor interrupting trade between the UK and mainland Europe, particularly regarding delayed UK imports from EU members. UK hauliers are increasingly reluctant to send trucks to the EU because the trucks cannot be filled for the return journey, doubling the cost to haulage companies, also known as 'deadhead' mileage. These two factors have impacted deliveries, reducing warehouse availability and thus increased storage costs for suppliers.
The UK food supply chain also continues to experience other inflationary pressures such as record high freight costs, elevated packaging material prices, and higher input costs, as gas, electricity and fertiliser prices reach record levels. This report evaluates the impact of these inflationary pressures on key food commodity categories.


Macroeconomics

The reopening of the UK economy following the lifting of lockdown restrictions has buoyed the demand for food, particularly from the foodservice sector, as workers go back into offices and hotels open up in line with the recovery of the tourism sector. Consequently, boosting the UK economy at a time of substantial price inflation pressures.
According to data from the Office for National Statistics (ONS), the UK's consumer prices surged by 3.2% in the twelve months to August 2021, a record month-on-month increase since records began in 1997 and the highest inflation rate since March 2012.
The reading surprised analysts who predicted a rise of 2.9%. The ONS noted that the August hike would likely prove short-lived as it mainly came on the back of a sharp fall in eating-out costs last year due to the government Eat Out to Help Out (EOHO) scheme.
However, the focus is now shifting towards soaring energy costs which will most likely increase household energy bills over the winter months, resulting in higher wholesale prices. Food and clothing prices are also expected to rise in the run-up to Christmas. At the same time, 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. Soaring freight costs and firm raw material prices in some food market categories are unlikely to be fully absorbed by the supply chain, thus transferring costs to consumers.


Category Analysis

Meat
UK meat processors concerned about CO2 and truck driver shortage

CO2, a by-product of fertiliser production, has been in short supply since two of the UK's largest fertiliser producers ceased manufacturing over the increase in gas prices. 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. The closure of the two fertiliser factories in Cheshire and Teesside, responsible for 60% of the UK's CO2 supply, led to a CO2 shortage.


                                                                                                                                                                            Source: Mintec Analytics

Meat processors across the UK are concerned about the CO2 shortage as it is mainly used to stun animals before slaughter and in the packing process to increase the shelf life of the meat product. CO2 is primarily used to stun pigs and chickens, whereas sheep and cattle are mostly culled using a captive-bolt stun pistol. Consequently, the CO2 shortage will likely impact the availability of pork and chicken instead of lamb and beef. CO2 represents a small proportion of meat production cost, meaning an increase in CO2 prices would not directly translate into firm meat prices. However, the CO2 scarcity could disrupt the meat supply chain as many animals will remain unslaughtered on farms, thus tightening market supplies. Accordingly, UK meat prices are likely to rise in the short to medium term until the production of CO2 is back to standard capacity.


                                                                                                                                                                             Source: Mintec Analytics

The meat industry was already struggling from the existing truck driver shortage in the UK caused by the COVID-19 crisis and Brexit. Some of the major foodservice chains have closed their outlets with diminishing meat supplies. In September, the Mintec price of chicken and beef in the UK reached GBP 1.9/kg and GBP 3.9/kg, up 11.8% y-o-y and 10.4% y-o-y, respectively, due to low supplies amid the structural adjustments (beef output was reduced in 2020 to deal with depressed demand amidst COVID-19) in the processing capacity.
Overall, the CO2 shortage and the lack of truck drivers could exacerbate the current supply tightness in the meat market, leading to higher meat prices. However, the government's financial support to fertiliser plants and issuing thousands of visas to foreign truck drivers could ease the situation and set a ceiling to any significant increase in meat prices.
Along with the above supply chain issues, rising feed grain and oilseed prices since Q3-2020 due to solid demand from China and adverse weather conditions across the continent hampered market supplies. Feed cost accounts for 60-70% of chicken production. In the four weeks ending 13th October, the UK wheat price rose by 8.6% to reach GBP 0.2/kg. The UK imported maize gluten price increased by 0.4% to GBP 0.2/kg over the same period. The Mintec soya meal price fell by 2.4% to GBP 0.4/kg in the four weeks ending 6th October.


                                                                                                                                                                             Source: Mintec Analytics

Dairy
UK fresh milk prices surge amid lorry driver shortage

The Mintec Benchmark prices (MBPs) for UK fresh milk (>3.5%) were last assessed at GBP 0.36/L in the week of 6th October, an increase of 9.9% quarter-on-quarter and up by 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.
The UK is experiencing shortages that cover the full breadth of the food and beverage supply chain, impacting production, processing, supply and ultimately demand. UK milk collection is going through its season trough; thus, there's no challenge with collecting milk from farms. However, dairy companies are facing labour issues to deliver their fresh milk to customers. Some UK farmers have been told to throw away milk, while logistics firms have warned about a potential collapse in parts of the supply chain.
The National Farmers' Union (NFU) produced a report outlining current workforce shortages in the dairy industry and measures applied by respondents to counter this labour shortage, such as increasing staff wages, retention bonus scheme, flexible shift patterns and extra holidays. However, despite a concerted effort, most survey respondents felt that they were still unable to recruit or retain sufficient levels of staff. NFU suggested introducing a 12-month COVID-19 Recovery Visa to alleviate the pressure before early next year when production begins to increase once again.
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 made it commercially difficult for shipping small orders, particularly short-life dairy products such as cream and skim concentrate. Since the 1980s, UK cream has been exported to the EU in bulk tankers. However, since the UK left the EU at the end of December 2020, cream exports have dropped as the new red tape requirement hindered UK cream exports to the EU. This has caused the UK price trend to diverge from the EU price, with cream prices in the EU rising at a higher rate.

                                                                                                                                                                             Source: Mintec Analytics

Grains
UK grain cost of production increases amid limited fuel supply

The 2022/23 winter crop planting is ongoing in the UK; however, the fuel shortage has contributed further to this year's supply chain chaos, resulting in higher input costs for grain production. In recent months, crude oil and natural gas prices have risen to near-record levels in Europe and Asia on the back of tighter supplies and growing demand. The gas price surge 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% to GBP 212.1/MT 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. This is because, unlike other crops, grains need a substantial amount of fertilisers to grow appropriately. Fertiliser nutrients, especially nitrogen, must be applied every year to the soil before planting; therefore, farmers are unlikely to reduce the amount they purchase and apply to fields, thus increasing the cost of production. Any further increase in grain prices will most likely be translated into higher consumer prices. Euronext maize price has also been trending higher in the last two months, with the September average price rising by 8.5% to GBP 219.6/MT compared to the average price in July.
In addition to the higher fertiliser and energy costs, UK farmers and millers are facing labour shortages. The supply chain crisis is likely to continue for some months, and consequently, UK grain prices are expected to rise further on the back of higher input costs.

                                                                                                                                                                                Source: Mintec Analytics


Oilseeds and Vegetable Oils
UK oilseeds industry has so far been unaffected by HGV driver and fuel shortages

The HGV driver shortage and reduced fuel supply had a limited impact on the UK oilseeds and vegetable oil industry. However, the Mintec Benchmark Prices (MBP) for rapeseed oil FOB Rotterdam increased by 81.3% y-o-y to GBP 1,277/MT as of 20th October, due to global supply tightness.
As the UK grapples with spiking natural gas prices, which climbed by 73% between 1st September and 12th October, fertiliser production will likely decline – mirroring the trend seen in the EU market. This will have a knock-on effect for UK farmers, with tight fertiliser supplies causing further input-cost inflation in the vegetable oil and oilseeds market. This would primarily affect the UK rapeseed market, as it is the primary oilseed grown in the country, while other oils are mostly imported. Additionally, the UK's distribution of imported oils could be impacted, leaving prices susceptible to hikes due to driver shortages and the consequent disruptions to the supply chain.
Even if the shortages are short-lived, concerns about these supply issues could arise again, and a gradual shift towards cleaner fuel could prompt increased production and consumption of biofuels in the UK.

                                                                                                                                                                             Source: Mintec Analytics

Fruit and Vegetables
UK fruit and vegetable market subject to volatility amid delivery constraints

The UK fruit and vegetable sector continues to grapple with the effect of labour shortages. A combination of Brexit and the COVID-19 pandemic has caused a labour shortage in the UK. Fewer EU workers are willing to travel to Britain due to the complex border controls and immigration policy, increasing labour costs. Since Q2 2021, the shortage of HGV drivers has disrupted the supply chain and thus delayed fruit and vegetable deliveries. The delays have left UK farmers unable to transport their produce, causing the wastage of large amounts of produce. The impact of the HGV driver shortage is not yet evident in fruit and vegetable prices. However, according to market participants, prices could become volatile in the short term. 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.
Many UK retailers are trying to mitigate the risk to ease pressure on the market. One of the largest retailers in the UK has turned to rail transportation to reduce the reliance on road transport. This could ease pressure on the HGV driver shortage in the market, thus limiting the price impact. However, if the current supply chain disruptions continue, manufacturers will not be able to absorb the rising production costs. 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 this cost is passed onto consumers.


UK onion prices continue to rise due to higher input costs

The Mintec price of UK onions increased by +21.4% quarter on quarter (q-o-q) to GBP 0.47/kg in October. The increase in UK onion prices can be primarily attributed to increasing input costs.
UK growers are facing higher costs for fertiliser, energy, transport and labour. Accordingly, to retain profitability, these costs are being passed onto consumers. Fertiliser costs have soared in 2021, mainly driven by solid demand, and prices are projected to average more than one quarter higher in 2021 than in 2020. Meanwhile, energy costs are at record highs, with the UK gas and power prices currently trading at unprecedented levels.
Furthermore, the rise in transport and labour costs in 2021 has restricted travel, impacting the flow of migrant labour from Eastern Europe to the UK. The UK imports a vast majority of its onions from Europe. The current shortage of lorry drivers and high shipping costs have made importing from Denmark more expensive, passing the additional cost to the importer.
The UK is expecting an average yield this year, despite the extreme weather conditions experienced earlier. The first quarter of 2021 was particularly wet, with significant rainfalls in January and February. March was dry, which allowed the planting of onions; however, frosts in April halted plant growth. The weather improved, but the quality of the 2021 crop is yet to be fully determined. Demand for onions in the UK has been robust over the last few months, in line with the reopening of the foodservice sector, and retail sales remain strong.
UK onion prices are likely to continue on an upward trend for the remainder of the year, with input costs projected to remain firm.


Nuts and Dried Fruit
UK nuts and dried fruit sector hindered by logistic problems

UK buyers in the nuts and dried fruit sector are also experiencing similar issues facing other sectors. Supplies are delayed at UK ports or buyers' warehouses amid the lack of road transport capacity. According to market participants, this is causing shortages across the supply chain.
The growing volume of unsold stocks, which the supply chain would normally absorb, is increasing warehousing and finance costs following higher inland haulage costs. Until now, the industry has absorbed most of these additional costs, but if the situation does not improve, consumers face higher prices.
The Mintec UK Nut Category Index, which comprises almonds, Brazil nuts, cashews, peanuts, pistachios, and hazelnuts, rose by 17% in the twelve months to the end of September. The increase has been primarily attributed to a surge in prices for Brazil nuts due to supply tightness in South America, and almonds, following solid global demand and drought conditions in California.

Fish and Seafood
Driver shortages and post-Brexit bottlenecks continue to destabilise the UK seafood industry

Food supply chain issues in the UK have also impacted the seafood industry, given the perishable nature of the produce, particularly those exported to Europe. 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. Brexit is another factor that has impacted the seafood industry, increasing inventories. Consequently, the Mintec price of an average-sized UK-farmed Atlantic Salmon fell by GBP 1.17/kg (-19.4%) from GBP 6.02/kg average in June 2021 to GBP 4.74/kg in September 2021. Other factors impacting the fish and seafood industry are:

• High fuel and energy costs due to soaring crude oil and gas prices. Fuel accounts for approximately 60% of the delivered cost of seafood, including for the seaborne fleets and processing plants
• Surging oilseed and fishmeal prices leading to higher feed costs for farmed seafood

Packaging
High energy and freight costs continue to support UK packaging market

Beyond the other input costs discussed in each section above, packaging material prices have increased consistently since May 2020, subsequently increasing overall costs across all food categories. More recently, the high energy and inland freight costs have further supported the rise in packaging material prices, thus elevating buyers' expenses.

                                                                                                                                                                            Source: Mintec Analytics

The UK packaging Mintec Category Index (MCI) increased by 60% y-o-y to GBP 1,313.42/MT in September 2021. The price increase is attributed to unprecedentedly high energy prices curtailing production capabilities for several packaging-dependent sectors in the UK, leading to a significant competitive disadvantage. These elevated energy prices are already severely impacting producers of tissue, newsprint, and food packaging in the UK, limiting their manufacturing capabilities. Besides the high energy prices, the current logistical constraints and high inland freight rates are causing months-long delays. According to market participants, new orders for paper packaging are scheduled for the end of this year. For aluminium packaging, the LME (3-month) price rose to a new high of USD 2,853/MT, up 9.6% m-o-m and 60% y-o-y in September 2021, supported by global supply tightness and soaring demand. Plastic packaging costs have also increased significantly, with the UK PET price rising by 44% y-o-y, while UK HDPE climbed by 51% y-o-y in September 2021. The market was driven by a global supply shortage, with many US and EU production factories under Forces Majeures since the beginning of 2021. Strong demand has exacerbated this tight supply, and soaring freight rates has meant that there have been limited imports to compensate for this supply deficit. The packaging index is likely to stay elevated until the logistic bottlenecks and energy crisis settle.

Concluding remarks

Prices in most food market categories have reacted directly to the UK's labour shortage and input cost increases. Responses include higher meat, dairy, and grain prices on the back of shortages, delivery constraints, and increased production costs. Oilseed and vegetable oil prices were already at high levels, so no significant price increase has been recorded due to the driver shortages, but it's only a matter of time before the supply chain disruptions start to impact prices. For less perishable raw materials such as nuts, the resulting impact of the labour shortage has been an increase in warehouse stocks and the consequent rise in storage costs. With market participants reporting that freight rates will remain high until the beginning of 2022, this factor will remain a significant driver for most commodities. As a result, UK consumers continue to face higher food prices, driven by a combination of all the factors discussed above and the continual increase in demand as the economy reopens.
Concerns around growing inflation remain, despite the ONS stating that the present spike is only temporary. Key officials from the Bank of England (BoE) recently signalled that the bank was ready to start monetary tightening, raising the cost of borrowing and thus curbing inflation. Nonetheless, several key factors, including the sharp increase in energy prices, bottlenecks in supply chains, high input costs and labour shortages, 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, with Trading Economics forecasting UK inflation at 4.2% in Q1 2022.




Intelligence Team

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