Price Points

Cost watch: what’s going up and what’s going down in August

Prestige Purchasing’s chairman, David Read, gives you a glimpse into the financial future.

6 August 2019
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July’s Foodservice Price Index reached yet another new highest ever level, but only because of unusually high drinks inflation. When this is stripped out, the basket of food prices fell month-on-month for the first time since last year.  

Boris Johnson has replaced Theresa May, formed his Cabinet and has set about taking the UK out of the EU by October 31 “come what may.” The prospect of no deal has increased, and the pound has continued to soften, particularly with last week’s by-election result cutting the government's parliamentary majority to just one.

The continuing weakening of the currency, though good for exports, will fuel food and drink inflation in the early part of 2020, even if a deal (or a further delay) occurs. Each 1% fall in the value of sterling puts about 0.4% onto FPI food inflation. 

ONE TO WATCH! Coffee unexpectedly spikes

image credit: Getty Images

The International Coffee Organization (ICO) is reporting that the average price for all group indicators rose in June 2019. This sudden spike in pricing was caused by fears of frost in some of the key coffee growing areas of Brazil. But (panic over!) as the concerns have now dissipated without global supply being greatly affected, we expect the price now to fall back.

The overall outlook for coffee is still good, with predictions showing an annual production 11m bags higher than last year. With production still exceeding consumption, we expect to see a second year of surplus, which should keep the price of coffee low for the time being.

ONE TO WATCH! Beef and lamb…. anyone’s guess

Obligingly (for BBQ season), liveweight lamb and cattle pricing has been gently nudging downwards – as it usually does at this time of year. That seems set to continue to do so in the weeks ahead, with lamb production this year particularly high due to fair weather, which has resulted in quicker than usual finishing times.

But protein prices look unlikely to stay this low, as China has agreed market access for British beef for the first time since 1996. This agreement is estimated to be worth at least £230m in the first five years – and possibly much more, as Asian markets have started to look to alternatives to pork such as chicken and beef following the onset of African Swine Fever.

On the other hand, beef and (particularly) lamb are vulnerable to a no-deal Brexit. The UK cannot consume the amount of lamb it produces and relies very heavily on hungry mouths in France, which buys 40% of the lamb we produce. The National Union of Farmers recently declared that a no-deal departure from the European Union could result in the mass slaughter of lambs that can no longer be sold to other European countries. This will produce a level of over-supply that at least in the short-term will reduce prices further.

DOWN! Cost reductions baked in

image credit: Getty Images

Wheat crops in the UK and overseas are looking largely healthy due to favourable growing conditions, with production from major exporters forecast to be the second highest recorded level of all time. Barley is now following wheat in this downwards trajectory, as a rise in demand for maize coupled with a bumper crop is sending prices downwards.

With prices of eggs and butter also easing nicely, we should see many bakery goods taking a gentle tumble in the months ahead.

DOWN! Milk and cheese on the turn

The cost of many dairy-based products has been stubbornly slow to come down this spring, but we are at last seeing significant price easing as farm-gate reductions feed through to the kitchen door.

We expect price to fall materially in the future as the Agriculture and Horticulture Development Board’s forecast puts milk production from April 2019-March 2020 at 12.56bn litres, the highest milk production for 29 years.

ONE TO WATCH! Deal or no deal

Chancellor Sajid Javid has announced £1.1bn to prepare critical areas for Brexit and said a further £1bn was available “to enhance operational preparedness this year if needed.” But both the Road Haulage Association (RHA) and Freight Transport Association (FTA) have suggested that the spending will be too little and too late to avoid large-scale supply chain pain.

What seems without question is that inflation in food will rise again next year, and that a disorderly Brexit on October 31 will create major issues in foodservice supply chains – in both product availability and price. Our businesses are, once again, largely in the hands of our politicians when it comes to the level of impact that will emerge.

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