What impact is food inflation having on producers and wholesalers?

Consumers tucking into sun-dried tomatoes at a picnic during the summer’s heatwave probably gave little thought as to how that food went from farm to fork.

But those in the food industry know only too well that processors, manufacturers and wholesalers supplying supermarkets and restaurants are facing heightened pressures from volatile food prices.

The CGA/Prestige Purchasing Foodservice Price Index (FPI), which uses price data between suppliers, caterers and wholesalers across several food categories, displayed a decrease of 1.7% from June 2018, although year on year inflation still stands at 3.2%.

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In August it reported that between February and June this year fish prices had risen by almost 40% before dropping 7.6% month on month. Uncertainty over future fishing quotas after the UK leaves the EU, a tuna ban and other recommended quota reductions will add further pressure on this category in the future.

Similar double-digit price hikes have been seen in other categories such as lamb, butter and bananas. Trade wars, adverse growing conditions and new or higher tariffs are believed to have contributed to a record 38% year-on-year inflation in oil and fats in July.

Feeling the heat

Meanwhile, the long, hot summer of 2018 saw fruit production soar in some parts of the EU, although the English Apples & Pears trade body is anticipating a reduced-size harvest due to the hot weather and has requested smaller specifications from supermarkets. The fine summer also boosted demand in soft fruits, which ripened faster but left farmers struggling to keep up with demand as they grappled with labour shortages, and some fruits were left to rot in the fields. Overall, fruit prices fell by 2.6% month on month but inflation stands at 12.2% year on year.

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“Up to the Brexit vote in 2016, we had an extended period of very low food inflation,” explains David Read, chairman of Prestige Purchasing. “However, the plunge in sterling, along with rising commodity prices, has changed that picture. Around 40% of all we eat and drink in the UK is imported and food inflation rose steadily to peak at 9% last August 2017.”

This reduced to just 2% at the start of the year as markets settled post- Brexit but is now increasing again.

“We’re seeing trade and tariff wars putting more pressure on commodity prices and extreme weather hitting crop production,” says David.

“A rising wheat price affects bread and animal feed, resulting in higher dairy and meat prices. A labour shortage is also being seen in fruit harvests this year, and if overseas workers continue not coming to the UK, we’ll see fruit prices rise higher. Sugar may also see an increase with new taxes.”

Adjusting the supply chain

David points to the August Consumer Prices Index (CPI) inflation figure of 2.4% to highlight further pressure on processors and manufacturers. “Supermarket and retailers are deferring some of the price rises back up the supply chain.”

He explains that those suppliers have, to date, been nervous about changing strategy. “Supply chains don’t like change, and businesses have been waiting to see what Brexit brings.

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“However, we’re seeing some reducing their reliance on European imports and striking new or extended deals with Southern Hemisphere suppliers. There are also contingency plans to do more in-sourcing with British suppliers.”

Indeed, Prestige Purchasing says that producers often have fixed-term contracts with large supermarkets to keep prices level, and some have resorted to importing product such as salad from Spain, Poland and the US to fulfil existing orders.

Increasing efficiency all round

It is possible for manufacturers to mitigate the worst effects of rising costs through greater efficiencies, including reducing energy, water and packaging use, reformulating recipes, forward buying and hedging arrangements.

Sam Brower, from MD of food manufacturer Quattro Foods, explains, “We import a range of ingredients, such as tomatoes and olive oil. The fall in the value of the pound against the euro has made importing more expensive. It isn’t just food; we’ve seen prices for plastic and cardboard for packaging rise by around 9% over the past 12 months.”

Quattro Foods supplies high-street restaurants and food-service providers and reports consistent rising turnover, but its profit margins have declined. “Two years ago, our profits were four times what they are now,” says Sam.

“That’s partially because buying has become more expensive. As an example, we received a letter today from a supplier putting their price up on a specifically imported key ingredient by 34%, and we’ve also been hit by rising labour costs such as the National Living Wage.

“We’re unfortunately caught in the middle between the growers/importers charging more and our food-service clients, who are also suffering, asking us to reduce prices as rising costs can’t be passed on to their end consumers in their entirety.”

It means that instead of asking Quattro’s food-service partners to raise their buying prices, Sam must sell produce for less. “We aren’t increasing our prices regularly for fear of key lines being de-listed,” she explains. “So we remain in an industry that’s learning to absorb price increases to maintain business.”

Smarter buying strategies

Quattro is increasingly looking for alternative suppliers, but many ingredients simply can’t be sourced from UK growers. “Tomatoes from southern Europe are just better quality, and our biggest bulk-buy materials, such as sweet potatoes, aren’t grown in sufficient quantities in the UK,” she explains.

“In terms of cost savings, many food manufacturers buy frozen raw vegetables in bulk, as they are cheaper; however, we worry about a drop in quality. It’s also difficult to look at hedging or negotiating directly with growers over price because we buy through commodity traders. Our savings have to come from business efficiencies.”

And what of the future? It’s suggested that food inflation caused by volatile weather and Brexit uncertainty will increase. It will require the government to ‘get a deal done’ and understand the nuances of the food industry.

See also: Food retailers could be hit hard in a ‘no-deal’ Brexit

This article first appeared on NatWest Business Hub

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