18/10/21 – Challenges of our Times / Food Inflation / allmanhall
SOARING STAPLES: The outlook for food price inflation
A food procurement expert examines the outlook for future food inflation.
How useful is CPI (Consumer Prices Index) data to predict inflation?
“It is quite customary for organisations to want to measure the change in prices over time. The Office for National Statistics (ONS) monthly inflation and pricing release of CPI data is often the principal index of choice. It is the official measure of household inflation, and it is easy to access and requires little expertise to distribute.
“CPI food data is very useful, but not when used in isolation. It is a backward-looking index that measures historic price movements via a weighted household basket of retail goods. Determining to what extent retail prices have changed over the past year may not help those that need to budget for the future.”
What is the outlook for future food prices?
“A good place to start is to examine what is happening to global food prices as these have the greatest pull-on UK food prices.
“Global food prices have been steadily climbing over the past 12 months (FAO Food Price Index +33.9% higher than prior year).
“Global food prices are significantly higher in real terms than those in both 2018 and 2019. We can in this instance rule out ‘base effects’ distortion as price indexes are well above pre-pandemic levels.
“All five key commodity groups have increased significantly on a global level. These are vegetables oils, cereals, dairy, meat, and sugar.
“2021 global food prices are nearing those of 2011, which still represents the 60-year high.
“Global shipping costs are at a ten-year high, fuelled by Chinese demand for iron ore – a key ingredient of steel. This impacts food prices as 60 per cent of global food miles are attributed to sea freight.
“Broad-based, industry-wide inflationary pressures across ingredients, packaging, transportation and labour are more likely to lead to foodservice cost increases. The active management of food wholesalers, product ranges, brand management and adopting a category management approach will help to offset impacts.”
What price changes are UK food manufacturers experiencing?
“The May ONS Producer Price Index shows significant increases in the prices that UK food manufacturers are paying for their inbound raw materials, leading them to pass on price increases via a rise in outbound goods (these are prices passed on to retailers and wholesalers).
“Regarding inbound cost increases (costs to food manufacturers):
• 12-month home food materials increase of +9 per cent
• One-month increase of 3.7 per cent
“Regarding outbound cost increases (costs from manufacturers to retailers and wholesalers):
• 12-month rate of 3.1 per cent
• One-month rise of 0.7 per cent.
“It takes time for changes in food commodity prices to feed through the supply chain to caterers – typically three to six months. Changes in food commodity prices do not pass through in full, as consumer food prices include the shipping costs of primary food commodities, the processing, marketing, and packaging of food, and final distribution costs such as transport costs.”
Will the UK labour shortage of drivers and pickers impact future prices?
“It certainly has the potential to drive up costs if the shortage is sustained for a prolonged period. A shortage of 60,000 drivers has the potential to push up wages – and, in turn, goods prices. There is plenty of anecdotal evidence to suggest that foodservice distributors and manufacturers are having to increase salary packages to retain existing drivers and to recruit new ones.
“Driver salaries are not the only costs incurred; supply disruption to inbound deliveries also adds cost to manufacturers, wholesalers and caterers alike. UK hospitality demand also has the potential to exacerbate labour shortages and service disruption. OpenTable data shows that seated diner walk-ins and reservations are 20-per-cent higher than the pre-pandemic corresponding period in 2019.”
Where else can we find signs of potential food inflation?
“With global food manufacturers’ annual input prices rising by 26 per cent, it is useful to check what our industry membership bodies, and globally-listed food companies, are reporting.
“Many well-known food companies – including Kraft Heinz, Mondelez, Nestle, Unilever, Kellogg, General Mills, Campbell Soup, Coca Cola and Hain Celestial – have posted warnings to investors about future food inflation.
“Unilever has stated that it is experiencing the highest levels of food inflation ‘in about a decade’.
“Nestle CEO Mark Schneider said: ‘From what we can see now, inflation is very much a 2021 and, to some aspect, also a 2022 phenomenon. This is a very volatile environment right now with very low visibility, lots of surprises happening, and again, we will take pricing action, and we have taken some pricing actions already’.
“Bidcorp is reporting a ‘number of macro challenges’ are starting to emerge – such as ‘inflation and labour shortages’ – that are representative of the broader-based challenges facing organisations operating in the UK. Bidcorp continues to state: ‘We are seeing large increases in the price of vehicles and mechanical handling equipment (and a total lack of availability), construction costs are escalating quickly. All of this will likely lead to wage inflation. We are also unbelievably facing a labour shortage in many markets where the recovery has been quick and sharp, particularly in driver and warehouse roles’.
“Sysco, the owners of Brakes, whilst not specifying inflation within its International Division, reported via its third-quarter 2021 results that it had experienced 3.5-per-cent product cost inflation in the US.
“Ian Wright, CEO of the Food and Drink Federation, has flagged a potential domino effect of staff shortages upon the industry, with shortages in farm pickers, drivers, abattoir workers, manufacturer process operatives and the hospitality sector. These shortages appear to be structural, which could create ‘a war for workers’ and ‘that can only have one consequence for everybody – an increase in prices’. He is expecting ‘mid-single digits’ inflation across the whole food basket, adding that some commodities ‘have already had double digit’ rises.
“Price increase mitigation and managing food inflation can be possible, with the help of an expert food procurement partner such as allmanhall. We work collaboratively to identify cost improvement opportunities through targeted category and range management, and leverage supply relationships, as well as using expert insights, such as those demonstrated here, to deliver better procurement outcomes.
“This is a challenging time in all aspects of catering and foodservice – and everything points to seeing prices rise, and inflation reaching a decade high, or more. Some of this will be manageable and mitigatable; some will be inherent and unavoidable, even with expert support. The industry needs to pull together, stay informed and aware, to ensure we’re prepared and able to cope with what the coming period may bring.”
Established in 2006, allmanhall is an independent, family owned and managed business providing expert food procurement and supply chain management, combined with hands-on catering and nutrition advice. https://allmanhall.co.uk
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