What goes up may not come down
David Read, Founder & Chairman of Prestige Purchasing suggests that a significant reset of the price of food and drink is under way.
Early last December we held our annual Foodservice Price Index Briefing in London. The key theme was how (and why) 2022 would see a surge in food prices after many years of relatively benign market conditions. True to our predictions, we saw FPI inflation levels rise from 3.5% in December to over 10% in February. In February 2021 FPI inflation was 1%. In the same month in 2022 it was over 10%.
At the time, our expectations were that we would see a double-figure % peak in the late Spring, followed by a gentle decline through the rest of the year. Many commentators, even the Bank of England, were calling the predicted rise in inflation a “temporary blip” while markets resettled as the pandemic’s effects receded. It would “be painful” they said “though quickly in the past.”
True to form this decade of volatility threw another roll of the dice and along came the Russian invasion of Ukraine. On its own, even in an ordinary year, this would have been a very significant and damaging event to the globe’s food system. But coming on top of a market only just beginning to recover from the combined effects of Brexit and Covid, the outcomes will now be much more severe, and longer-term than we had predicted just a few months ago, perhaps even as high as 17% in 2022.
What is so crippling about this particular conflict is that it is truly multidimensional. It has reduced PRODUCTION levels of food staples such as grains and oils, it’s driven up the cost of DISTRIBUTION by increasing oil prices, and raised the cost of ENERGY by restricting gas supplies. These factors create a spiral of the added cost that works right through the value chain.
For example, let’s first consider food PRODUCTION. As I write the war is 54 days old. It is mid-April and the planting season in Ukraine (which should now be well underway) has been severely impacted by the war. Ukrainian grain exports from the winter harvest have been largely restricted to rail transport as the ports remain closed. Similar challenges exist with Sunflower, with Ukraine’s exports representing nearly 80% of global volumes. Russia, as the protagonist is the world’s largest wheat exporter, with about 17% share of the global export market, and is the second-biggest supplier behind Ukraine of sunflower seed. The Black Sea region as a whole exports at least 12% of global food calories. Global stocks of these staples are falling, driving prices upwards and forcing the use of substitute products – which are also rising in price fast. As production readjusts in the months ahead we will see markets become calmer, but it’s unlikely that they will return to 2021 levels.
Production costs at home are rising too. Western sanctions on Russia, a major exporter of potash, ammonia, urea and other soil additives, have disrupted shipments of these key inputs around the globe. Ammonium Nitrate in the UK was just £283 per tonne in February 2021, and has risen to £839 currently.
From a DISTRIBUTION perspective the largest impact has been upon the cost of oil. Last December a barrel of Brent Crude was around $70. It peaked in early March at $130, and has recently fallen back closer to $110 – but still nearly 60% higher than December. This is the predominant fuel that moves our food around.
And the whole UK economy is suffering from an explosion in the cost of ENERGY. Our reliance on gas is enormous. At this time last year the wholesale price was in the region of 50p per therme. It is currently over 200p. This is felt not just in restaurant operations, but at pretty much every step in the supply chain.
Finally, this all needs to be set against the background of a food system that was already struggling on the verge of crisis. Brexit and Covid have proved that stable, low cost, just-in-time supply was a luxury that we took for granted. And climate change, already a major factor in food production, has yet to show us the majority of its huge impact on how we will all eat in the future. As each new event unfolds, it’s easy to think them individually as temporary problems. My sense is a different one – that we are witnessing a more fundamental shift in the cost and the value of the food that we eat. To remain competitive in hospitality we will need to be creative and adapt to this new paradigm if we are to survive.
Meanwhile, back in Ukraine the fact that the Russian Army’s initial plan has not been successful has led to a more focused strategy in the Donbas. If this continues then even prolonged hostilities there may reduce the overall impact on Ukraine’s overall food production. But the capture of Odessa would put all of Ukraine’s warm-water ports into Russian hands, seriously hampering Ukraine’s trade in food. Success in the Donbas would also provide a platform for increased hostilities in the rest of Ukraine. This war might well roll on for years.
David Read established supply chain consultancy Prestige Purchasing in 1998, since when it has become recognised as the thought leader on procurement and distribution within Foodservice sector. David has spoken at World Travel Market, Food Ethics Council Business Forum, and several Propel M&C Report events
