The Great Food Price Crunch

Inflation accelerates

Yesterday the Bank of England predicted that inflation in the UK will exceed ten percent by the end of this year for the first time since 1982. As we know, energy prices – particularly gas and petrol – have been soaring, but so has the cost of food. And not just fancy foods but basic foodstuffs like grain and inputs like animal feed. Pasta is made from durum wheat and chickens are fed canola and soybean meal – so two staple foods which are normally considered affordable are rising rapidly in price too.

The Monetary Policy Committee (MPC) of the Bank of England felt compelled to raise interest rates on Thursday 5th May once again – to one percent. This will, in turn, put upward pressure on mortgage rates, and thus further exacerbate the budgetary challenge faced by millions of households. The MPC’s decision followed that of the Federal Reserve in the US to raise rates by 0.5 percent on Wednesday.

While many countries are facing an equivalent cost-of-living crisis, the UK inflation rate is stubbornly higher than in the eurozone. Hence many business leaders and pundits – amongst them the Chairman of ASDA, Lord Rose – have blamed Britain’s inflationary woes on Brexit. In fact, Brexit is just one factor. First there was Brexit; then there was the pandemic and the attendant disruption to global supply chains; and now there is a vicious war raging in Europe’s breadbasket which will have consequences for agricultural commodity prices for years to come.

It is true that Brexit has generated additional “frictions” for the import of foodstuffs. Lorries arriving in Dover must undergo checks and inspections – and it is even worse when they travel in the opposite direction. Research published last week by UK in a Changing Europe estimates that the increase in UK-EU trade barriers caused a six percent increase in food prices in the UK between the end of 2019 and September 2021 – even before the current inflationary wave hit our shores. Adam Posen, the American economist and a former MPC member, stated in a recent paper for the Peterson Institute that Brexit is “80 percent of the reason” for the UK’s inflation problem. His judgment is not shared by all economists.

One reason that the inflation rate in France – at five percent – is lower than in the UK is that the government there has aggressively intervened in the energy markets to moderate price hikes. It can do so because much of the country’s energy generating capacity is under state control. Spanish inflation came in at almost 10 percent in March; and inflation-psychotic Germany recorded 7.6 percent, requiring a national dosage of smelling salts. This comes at a moment when Germans are bracing themselves for the dislocating effects of renouncing Russian hydrocarbons – something likely to cost them at least 0.5 percent of GDP growth this year.

The USA’s consumer price index (CPI) jumped by 8.5 percent in March, year-on-year. That was the sharpest rise since December 1981. Even though the USA is self-sufficient in energy, energy prices there have risen by over 30 percent in the last year.

The impact of the war in Ukraine on food prices

Farmers, here and abroad, are experiencing alarming rises in the prices of the “three Fs” – feed, fuel and fertiliser. And then there is the price of “L” – labour.

Russia and Ukraine play a pivotal role in global agricultural supply chains, both being huge exporters of wheat, barley and, in Ukraine’s case, sunflower oil. Ukraine accounted for about oner tenth of global wheat production last year and 15 percent of maize (sweetcorn) production. Much of these agricultural commodities are exported out of Odesa and other Black Sea ports, including Mariupol on the Sea of Azov which has been under merciless siege. Even if the sieges come to an end, the surrounding waters have been mined.

The fact that the planting season is now well advanced with much reduced sowing means there will be only a poor harvest in Ukraine, come September. It seems that since Russian forces retreated from north of Kyiv, Zhytomyr, Sumy and Chernihiv, some Ukrainian farmers have been able to plant corn, soybeans and sunflowers on time. Green Square Agro Consulting estimates that Ukrainian food production will fall by at least 30-40 percent this year relative to last. However, manpower is limited, seed supply has been disrupted and tractor diesel is running short. Even given a limited harvest it could prove almost impossible to ship it. Last year’s winter wheat is already going to waste.

The impact of the war has been immediate. The Food and Agriculture Organisation’s price index jumped by 13 percent in March. The price of a bushel of wheat has risen from $3.50 at the beginning of this year to over $11 now. Maize is up by 30 percent, and soya by 70 percent.

Fertiliser prices are also soaring given that Russia, Belarus and Ukraine account for about 40 percent of global potash production. The first two of those countries are subject to trade embargoes, and it is virtually impossible to pay for them anyway. UK farmers are paying at least three times more for fertiliser than 12 months ago. According to AHDB, ammonium nitrate costs £839 per tonne in March – up from about £250 last year.

The leading fertiliser producer in the UK is CF Fertilisers UK Ltd. which has a factory in Billingham, Cleveland. CF manufactures over 1.5 million tonnes per year – that is 40 percent of UK fertiliser demand. According to David Hopkins, Managing Director of CF Industries, about half of all crops grown worldwide are dependent on mineral fertilisation because there is insufficient nitrogen in the soil. So, fertiliser is essential to feed the world. Since August 2015, CF UK Ltd has been an indirect subsidiary of CF Industries Holdings, Inc. of Deerfield, Illinois, the share price of which is up by nearly 50 percent this year.

Meanwhile, down on the farm…

Confronted with spiralling fertiliser costs, British farmers are planting less this spring. That means there will be shortages of fruit and vegetables come the autumn, in addition to more expensive milk, eggs and bread. Wheat production has been falling in the UK and in the EU because of falling margins. The amount of arable land under cultivation has also been falling as farmers have been paid to take land out of production for environmental reasons such as restoring wildlife habitats.

All direct agricultural subsidies will be phased out in England by 2028 but farmers will be paid for “rewilding” initiatives. Why would any sane farmer endure the graft and stress of producing food when he could just plant trees? Add to that the trend that I have frequently touched upon in these pages – that prime arable and pastoral land is being given up for wind “farms” and huge solar arrays. Not to mention the relentless demand for green field sites to build more houses.

In the early 1980s, Britain was about 73 percent self-sufficient in foodstuffs. Today, that figure is down to 55 percent and falling, even as the population continues to increase because of mass immigration. We are 88 percent self-sufficient in wheat, and 86 percent self-sufficient in beef. At least we produce more milk and lamb than we consume. And we are entirely self-sufficient in poultry, eggs, carrots and swedes. But Britain, without a coherent food security strategy, is still at the mercy of global markets.

Just as Europe has become unhealthily dependent on the import of Russian hydrocarbons, so it has also become reliant on Russian grain. Both dependencies must be addressed; but, as we know, it is challenging to re-route supply chains overnight. Growing our own grain would also reduce food miles and thus carbon emissions.

The number of small farms in the UK has been declining for decades. Between 2005 and 2015, 28,200 farms went out of business. As part of the transition to the post-Brexit agricultural regime, the government in England is offering the Lump Sum Exit Scheme for farmers who sell or transfer their land. That could incentivise struggling farmers to retire early, given that the average age of UK farmer is 59. A forward-looking government which understood the food security issue would be paying young people to become farmers.

Eggs easy over

The European poultry industry has been hit by the exodus of Ukrainian butchers. Many have left the UK and countries such as Poland to go back home to fight. A lot of chicken that is used by catering companies to provide, for example, school and hospital dinners in the UK, is sourced from Poland. Many catering companies supply to schools and hospitals under long-term contracts, so they are not able to pass on increases in costs immediately.

Noble Foods grades, packs and delivers more than 60 million British eggs each year. One of its brands is the Happy Egg Co. This business has been reeling from a widespread and protracted outbreak of bird flu across Britain. From November last year until just this week, birds had to be kept indoors and workers were prohibited from travelling between poultry farms for fear of spreading the disease. Thus “free-range eggs” in the supermarkets became “barn eggs”.

Keeping birds inside entailed higher energy bills. According to the British Egg Industry Council, costs for egg producers rose by 30 percent in the first quarter of this year. Consider also that the cost of packaging has soared Amazon and others vacuum up huge volumes of cardboard.

Some poultry farmers have even threatened not to restock their sheds with new flocks. 70 percent told the British Free Range Egg Producers Association recently that they would exit egg production within a year without a price rise of at least 80 pence per dozen eggs.

Agri-tech

One way to boost crop yields is by gene editing. Huge advances in biotechnology have been achieved to make crops more resistant to pests and disease. But many such genetically modified crops have been banned in the EU. The UK can now go it alone in this sector but has been slow off the mark.

Also, advances in robotisation could eventually replace human fruit-pickers with machines. That is easier said than done, as current models bruise delicate fruits like raspberries and strawberries. Vertical farming, where vegetables are grown in stacked trays in a temperature-controlled warehouse under artificial lighting, are already widespread in Japan. I’d like to look at that in more detail shortly.

Meat substitutes

If we can transition to plant-based meat and lab-grown meat – as our Chairman, Jim Mellon, thinks we shall – that would entail that less grain would be required for animal feed (though presumably more grain would be eaten by humans).

But there is a robust debate underway as to exactly how green vegetarianism and veganism are. Vegans claim that abjuring meat is the only way to save the planet; yet proponents of regenerative farming point to how dung-fertilised pasture can act as a vital carbon sink. Campaigners like Jamie Blackett claim that fears about cows emitting methane have been exaggerated. I’ll have more to say about this conversation soon.

The fact is, however, that huge advances are being made in the field of synthetic meat and fish. The Israeli start-up Plantish has generated boneless prototype salmon-type fillets which reportedly taste like salmon and have a similar nutritional content. The fillets are made by reverse-engineering an actual fish and mimicking the balance of components in a lab – protein, fat, water, omega oils etc. Plant-based building blocks are then fed into a 3D printer which layers them to imitate actual salmon flesh.

Last year, Nestlé launched a shrimp alternative made of seaweed and peas. And FTSE-100 behemoth Unilever is behind The Vegetarian Butcher brand which supplies plant-based burgers to Burger King.

For all that, Beyond Meat, the Californian plant-based meat producer which started so promisingly, has become one of the most shorted stocks on the NASDAQ. Sales forecasts have repeatedly disappointed the market, even though Beyond Fried Chicken is now being served in KFC outlets across the USA.

The humane slaughter of livestock requires CO2. Last autumn, there was a desperate shortage of the stuff (even though we pump billions of tonnes of it into the atmosphere every day). The Brazilian meat producer, JBS, has been harshly criticised for its rapidly rising carbon emissions by the Institute for Agriculture & Trade Policy. JBS’s US subsidiary has committed to achieving carbon net zero by 2040. It will be interesting to know how.

I don’t doubt that synthetic meat will become an increasingly important sector within the food industry, given its environmentally friendly and cruelty-free credentials. But I can’t see that it will alleviate the food price crunch.

Competition intensifies in the UK supermarket sector

The price of four pints of milk at a UK supermarket is expected to rise from around £1.10 to around £1.60-£1.70. A typical pack of butter is likely to rise from £1.55 to over £2, according to Kite Consulting. Grocery price inflation hit 5.2 percent in March – the highest figure since April 2012.

Figures from Kantar at the beginning of April showed that supermarket sales were down 6.3 percent in the 12 weeks to 20 March, as hard-pressed families cut back and as people started going out again after the pandemic hibernations. The flip-side of that is that shoppers are focusing more intently on value in an already ferociously competitive food retail environment.

Tesco is still the market leader in the UK with 27 percent of total supermarket sales, followed by Sainsbury’s on 15.1 percent and ASDA on 14.5 percent – but their market shares are all down on last year. Morrisons comes in at number four on 9.5 percent – but it is being hotly pursued by the two privately-owned German discounters ALDI (8.8 percent) and LIDL (6.6 percent). About one million more British shoppers visited ALDI and LIDL in the first quarter of this year compared with last year. ALDI now has 950 stores in the UK and LIDL has 919. The Co-op has a six percent UK market share, and Waitrose (part of the John Lewis Partnership) brings up the rear with 4.8 percent.

It is notable that the most highly leveraged players – ASDA and Morrisons, which both fell to US private equity giants – experienced falling sales last quarter, by 9.9 percent and 11.5 percent respectively.

Yet the supermarket majors are still in expansion mode. Tesco is planning to open 65 new stores over the next year. Sainsbury’s, which has just reported £854 million annual profits, says it is trying to limit price increases. The shares of both these giants have disappointed investors so far this year.

On Wednesday (04 May) George Eustice, the Environment Secretary, told Sky News that people should consider buying “white label” own-brand goods when they visit the supermarket in order to reduce their grocery bills. There used to be an ongoing argument in my family as to whether ASDA own-brand cornflakes tasted as good as the Kellogg’s variety – which was never quite resolved.

Over many years, governments have sought to keep food prices down. But, according to Chris Smaje, author of A Small Farm Future, cheap food is an illusion because the real costs of producing “cheap” food are borne in terms of adverse health outcomes (of which obesity) and environmental degradation. Both of those things carry a price tag.

A new era

Brexit. Covid. War. Inflation. Recession? Impending climate “crisis”?

Clearly, the period of disinflation – which I date from the moment when China joined the Word Trade Organisation in December 2001, opening the era of rampant globalisation – is now over. It has given way to a period of inflation, supply side dislocation and de-globalisation. The paradigm has changed. And the age of cheap food is over.

The great food price crunch will get much worse before prices stabilise. Energy prices initiated the cost of living crisis: but to some extent energy expenditure is discretionary – you can decide to forego the Bank Holiday Monday car trip to the seaside. You can turn down the thermostat. Or again, you don’t have to take 20 flights a year (as I used to). And indeed, higher energy prices will be more effective at reducing carbon emissions than green taxes. In contrast, people must eat to live.

In most countries agriculture is largely state-controlled and heavily subsidised. This often leads to poor allocation of limited resources. There are a few notable exceptions, such as New Zealand which has become “the larder of Asia” without any state subsidies to farmers. But the current UK government, which has lost the confidence of the farming community – even though they are natural Tory sympathisers – seems to have no clear vision of how to reinvigorate this critical sector.

If less well-off people in the UK, Europe and North America will experience economic pain in the year ahead and beyond, that is nothing compared to what less well-off people in the global South will contend with. In Egypt, the government has already increased subsidies for bakers, straining national finances. In Turkey, there are long queues at government-subsidised bread markets. Indonesia has halted palm oil exports. And India is considering a ban on grain exports, given the current heat wave.

Any famine, or near-famine, in the Maghreb, in Afghanistan, Yemen and Ethiopia, which are already facing acute food insecurity, will precipitate another migrant crisis. We are all going to be coshed by this cost-of-living crisis. But at least none of my readers will go hungry – as many people will in the developing world.

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Speaking personally, I’ve noticed a difference at ASDA since Walmart sold it to brothers Mohsin and Zuber Issa, and their backers, the private equity firm TDR Capital, in 2020.

I usually buy everyday goods (cleaning products, freshly baked bread, premium beer, dog food) at ASDA. When I’m in Kent, I walk to the local “superstore” and back, a mile or so each way, with a re-usable bag.

I don’t wish to be unkind, but in Walmart days the helpful staff (“colleagues”) were always smart – now most of them look as if they’ve been dragged through a hedge backwards. The amount of litter outside is displeasing. There are abandoned, and often maimed, shopping trollies stretching out over a quarter mile radius. The shelves are untidily stacked, and price tags are often missing. Niche items like pulses are often out of stock.

What is going on? I’d love to know.

Listed companies cited in this article which merit analysis:

• CF Industries Holdings Inc. (NYSE:CF)
• JBS SA (OTCMKTS:JBSAY)
• Nestlé (SWX: NESN)
• Beyond Meat Inc. (NASDAQ:BYND)
• Tesco (LON:TSCO)
• Sainsbury’s (LON:SBRY)