Prestige Purchasing’s chairman David Read looks at the reasons behind the dramatic fluctuations in food inflation over the past two years and highlights the supply risks in the year ahead.

It was a calm and beautiful day in Kovalam, a seaside resort in Kerala, India’s southernmost state. I strode out through the gentle surf, stood waist deep in the warm waters, and looked back towards the shore to admire the Victorian lighthouse. For just a few seconds.

And then it hit me. I was suddenly under water, my feet in the air and my head hitting the stones that I had been walking on just seconds before. My lungs burst as I breathed in sea water. I swallowed what seemed like gallons, as I tried desperately to stop being tumbled head over heels. And then just as suddenly I was lying on a clear stretch of beach with the water falling away in front of me, coughing and retching, rasping for the now freely available air.

Business can be like this too. Look the wrong way for just a short period of time, and the un-watched for can set your plans back considerably. In my view, the next nine months – from October 2018, to June 2019 represent one of the most uncertain periods that I can ever remember in UK Food and Drink supply, and operators would be well advised to pay a lot of attention to the way in which things unfold.

Since the result of the EU referendum we have seen a significant increase in the CGA Prestige Foodservice Price Index (FPI) – from 101.1 to the current 111.9. That’s 10.8% inflation. In the period ahead we are likely to see a further increase, but at this stage it’s unclear quite how large this will be.

There are two key reasons for this likely increase. First, the exceptional climatic conditions experienced globally this year. Essentially, we create food in three ways – growing, feeding (the stuff we grow to livestock) and catching (from the wild). When the climate is favourable we can grow more to eat, and have more to feed our livestock, increasing yields and lowering costs. This year the converse is true. This statement from a leading potato fries manufacturer is typical of what we are seeing across the supply sector right now:

“All potato growers in our growing regions are facing dire challenges and are impacted heavily. A cold and wet spring significantly delayed planting for the 2018 crop. In all regions heavy showers in April made the situation even worse, which led to local water damage on recently planted fields and emerging crops. Growing conditions in May improved, due to available water/moisture in the soil and warm temperatures. This helped to catch up for the delay until the end of May. From that moment, conditions turned extremely unfavourable. Crops suffered from severe and continuous drought and record hot temperatures. Where June had already been one of the driest and warmest in recent memory, July turned out to be the driest and hottest ever on record, with no rain at all, and temperatures between 30˚- 40˚C.”

2018 potato yields are below 90% of typical levels, and manufacturers like the one above are pressing for around 20% increases based upon low yields and worsening foreign exchange rates.

Most summer crop yields, not just potatoes, have been poor across the board and this is in no way an exception.

The second reason is Brexit. There are commentators in the trade media stating that the only way prices can possibly increase (after our departure from the EU) is if we impose trade tariffs on imports. I wish this were true, but at best it’s extraordinarily naive. The cost of our food and drink is determined by a much more complex mix of factors. Many of these are pointing the wrong way at the moment (such as climate), and Brexit is likely to add to the negative bias.

At best we will achieve a frictionless and tariff free trading arrangement with the EU, and over time will negotiate trade deals (these do not materialise quickly) with other parts of the world that will enable us to access low pricing. In this scenario we may see lowish levels of inflation on the basket of goods we use, but we will need to ensure that cheap food imports as they emerge do not undermine our farming production (we produce 60% of what we eat at home) by being lower on the many high production standards that we are used to.

At worst we will exit the EU without a deal. In this case the risks of disruption to supply on the c40% of food that we import are high, and the impact on the value of sterling (and therefore the cost of our imports) is likely to be considerable. The key to all of this is what happens at ports, and the government has not published sufficiently clear contingency plans (as of the date of writing this article). Price stability depends upon there being enough supply, and in this scenario we may see unprecedented levels of inflation (perhaps as high as 15%-20%, and for a considerable period) while the supply chain recovers from the change.

So, this is not a time to be Looking the Wrong Way. In the year ahead operators need to be closer to their supply chain than ever. The government may be too busy to carry out contingency planning, but having clear sourcing plans for every single ingredient, and cost based triggers to generate a review of selling price will be a critical part of maintaining profitability in a time of extreme turbulence.

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