Global Food Insecurity
Rising inflation and the conflict in Ukraine causes a lack of key commodity availability and price rises causing global food insecurity.
The UK is currently experiencing the highest level of inflation that it has seen in over 40 years. In May, the Office for National Statistics calculated a 9% growth rate for the Consumer Price Index, which means prices are rising fast with no sign they'll slow down anytime soon! Food items alone have increased by 4%, with energy costs skyrocketing even more at 14%.
The recent increase in agricultural commodity prices is of worldwide concern. For example, the United Nation's Food and Agriculture department estimates that spot traded crops have gone up by 70% since their lowest point this year. In addition, poor wheat harvests, strong global demand, Covid-19 related supply disruptions, and Russia's invasion of Ukraine is deepening global food insecurity. In fact, the Governor of the Bank of England recently described his sentiment regarding food prices as "apocalyptic."
When combined with rising household energy bills and an expected fall in disposable incomes, there are growing concerns that the UK may see a suppression effect on economic growth. For example, decreasing disposable income could lead to a reduction in new car sales and other industries tied more heavily to this type of spending. Still, foodservice sectors may also see reduced demand later in the year.
The Bank of England has not shied away from the fact that an economic recession may be triggered to reduce inflation to the target of 2%. The primary tool they possess for achieving this goal is raising base lending rates, which have already increased to a 13-year high of 1%. However, further increases would be detrimental and hurt growth, which declined by 0.1% last month alone!
KEY COST DRIVERS DUE TO THE UKRAINIAN CONFLICT
As mentioned above, the Russian invasion of Ukraine has had a massive impact on global markets, as both countries are leading producers of numerous essential goods. The ongoing conflict, combined with sanctions against Russia, has removed a significant volume of commodities such as wheat and sunflower oil. However, price rises for many of the underlying input costs that contribute to producing a comprehensive range of foodstuffs are also of major concern. We cover these four key 'f's' below.
FUEL - The western world is attempting to reduce its dependence on Russian oil and gas. However, this lowers supply options and has resulted in higher prices for diesel, petrol and electricity. This situation has directly impacted the running costs for many factories and operations across foodservice, which means higher prices for the end product. Furthermore, the agricultural sector has also been affected as farmers face higher costs due to reliance on red diesel machinery.
FERTILISER - Russia is a significant producer and exporter of fertilisers, which have been vital to the world's food supply. According to UN data, in 2021 alone, Russia accounted for 15% of global exports. In addition, gas is a predominant production element of fertiliser. Therefore, European producers face far higher costs for a product they rely so heavily on for their crops' success.
FEED - The cost and availability of animal feed are significant variables for the livestock market. Feed often accounts for over 50% of total production costs. This market has seen significant upward pressure since the war began due to Ukraine's position as a major exporter of corn, maise and oilseeds. Maise accounts for 44% of the EU's animal feed market, and rising prices have resulted in noticeable price increases for both poultry and pork. As a result, farmers have had to reduce herd sizes to remain profitable in some cases.
FINANCE - With inflation on the rise, central banks respond by increasing base lending rates. This action makes it more expensive for producers to secure the finance needed to invest in new equipment, materials and components that could increase efficiency - but at what cost? That's up for debate! However, one prediction is that it will negatively impact supply levels.
The bottom line is that if you run a foodservice business, price rises are inevitable. However, there are ways to mitigate the impact of these increases. Get in touch with us, and we can help you look at your in-costs to identify any areas where you can make savings. We'll also keep you up to date with all the latest news and information on relevant categories so you can make informed decisions about your business as the market reacts.