Brexit: food cost uncertainties
By Richard North - August 15, 2020
The Grocer, I suppose, is worth listening to – when it sticks to what it knows about. In this case, it’s talking about food prices, predicting that we are going to see rises in the new year. That, it says, is the reality of Brexit.
The magazine starts off with the premise that the fundamentals of food price inflation have been sorely tested by coronavirus. What has confused the issue is the price of oil – the most important commodity to the food industry. This has fallen significantly, while food-based commodity prices have remained relatively stable.
Interestingly, it seems that the rise in home deliveries has also given the supermarkets a break. In-store sales are highly competitive and margins are often cut to the bone by promotions. On-line sales, however, are discount-free keeping margins healthy. The £750 million business rates holiday has also helped.
To that extent, it has been a seller’s market, helped further by the vast number of “staycationers” and the heatwave (such that it has been). These, says the Grocer have provided further optimal conditions for grocery sales.
But, despite everything, it isn’t going to last. Tesco and Sainsbury’s insist they are not taking advantage of customers. The lack of promotions, they say, is due to a focus on EDLP. That’s a new one on me, but it stands for “everyday low price”, meaning that all their products are at stable, competitive prices.
More prosaically, this means that prices are already at rock bottom – or as low as they are going to get. Further upstream, suppliers have already sucked up extra costs and, with cost increases in the pipelines, prices can only go one way.
Pressures, of course, are likely to be variable. Export restrictions on UK meat production – especially lamb – might mean temporary surpluses, with significant effects on prices while stocks last. On the other hand, labour shortages for harvesting vegetables and other farm products might have the reverse effect, with shortfalls driving up prices.
Food processing has also become heavily reliant on immigrant labour and, with many citizens of EU member states returning to their home countries, short-term labour shortages might also drive up prices.
In the medium to long-term, however, the high-capital low labour dairy sector could ramp up production to cover any shortfall, although there is little room for expansion in fresh milk sales. Any increase in capacity would have to be driven by demand for processed foods, otherwise surpluses could trigger a price crash.
Much the same goes for the possibility of striking trade deals with other third countries. It is unlikely that we will see anything in the short-term by way of a trade deal with the United States.
And, in terms of sourcing new suppliers, while global grain prices are stable, with plentiful stocks anticipated for the coming year, meat and poultry producers, and fruit and vegetable growers, may need time to ramp up production – and assurances as to continuity of business before so doing.
For less developed countries, there will almost certainly be standards issues. Potential suppliers will have to meet not only hygiene and safety standards, but quality and packaging specifications, and be able to guarantee volumes and supply frequencies. These will be necessary to meet supermarket buying criteria. From initial contact, it can take two years or more before buyers are prepared to commit to long-term contracts.
Here, there is an interesting issue. From 31 December, the UK will be entirely responsible for its own agricultural policy – the first time in nearly fifty years. Policy formulation in this complex area is not straightforward and much institutional memory has been lost. From a standing start, there is very little UK experience on which we can reply.
Balancing domestic production with imports is never easy at the best of times. Where new markets and suppliers are being sought, uncertainties will make the task doubly difficult. Yet both domestic producers and importers will need a stable, predictable trading environment that only well-founded policy can bring.
Given this government’s world-beating reputation for incompetence, there can be no great confidence that it will be able to deliver an effective agriculture policy, or even create an environment where investors feel safe to finance expansion where needed, much less ensure a well-regulated food supply.
And if the government falls back on its “fwee twade” mantra, and seeks to create a laissez faire trading environment, disaster will most certainly ensue. There is no developed country on the planet with has a free market in agriculture. All are managed to a greater or lesser extent, and highly regulated. Supply chain management is essential if price stability is to be maintained.
Unsurprisingly, the Grocer says Brexit is the catalyst. While the government’s last-minute £200 million investment in the so-called Trader Support Service has been welcomed as a solution to the Northern Ireland border, this is a drop in the ocean when faced with all the potential extra costs of Brexit.
Total customs bills could cost as much as £7 billion a year, an unspecified proportion of which will be borne by food importers. Increased transport costs, also need to be factored in. Shortages of transport and delays may also reduce delivered volumes, which could have price implications. Unpredictable currency fluctuations will add to uncertainty.
Then there are tariffs to consider – an unknown quantity until we get some indication of what sort of a deal – if any – the government manages to secure. What rightly concerns the industry is that, with less than five months to go before TransEnd, there are few discussions between retailers and suppliers on how the burden of cost increased will be shared.
That, of course, is an industry view but, one way or another, consumers will eventually pay. And the biggest handicap of all is uncertainty. Yet this is the one thing at which this government seems to excel, in which case it looks as if we are in for a torrid time. With food poverty already an issue, there is little margin for error.