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July 13, 2022

Could the climate crisis mean a new era of higher food prices?

Debates are heating up over the cost of food production and the investment needed to make system more sustainable.

By Simon Harvey

The price to put food on the table right now is dominated by the current inflationary environment. But beyond the Ukraine war and post-pandemic distortions in supply chains, a debate is playing out around the climate crisis and longer-term food prices.

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Does the present-day rising cost of food perhaps exemplify, or serve as a testing ground, for what we might have to pay in the future? And, more importantly, whether we are prepared to accept a higher price for what we eat to protect the planet.

“That’s going to be the big reveal,” says John Baumgartner, a US-based managing director at Japanese investment firm Mizuho Securities, who uses the backlash against rising home energy bills in the US and UK as an example of how consumers might react to longer-term higher food prices.

“It sounds great on paper – you want to be sustainable, you want to do good for the environment, but are you willing to pay more to make that happen? How serious are people going to be about that?” he tells Just Food.

The conflict in eastern Europe only adds to the unknowns for the moment, with the current debate dominated by the burning rhetorical question of how long the war will last. “Is it resolved quickly, does it linger on and become a Syria, back and forth for a number of years,” Baumgartner asks.

Until resolved, the conflict is likely to continue to artificially hold up global commodity prices, from wheat to corn to sunflower oil, and fertiliser to fuel, all key components affecting food prices.

With food manufacturers passing on double-digit price increases to retailers, in some cases, and market watchers envisaging more to come until inflation abates, how much of that will eventually be given back to the consumer?

“If everything works out, maybe you see commodity prices come down 12 or 18 months from now, but even then it’s kind of hard to see them coming down at the same rate they went up,” the Mizuho MD contends. “It’s hard to see really anything out there on the horizon policy-wise or geopolitics-wise, that would suggest you’re going to have a massive 40-50% drop in commodity prices to get back to where they were in 2018 or 2019.”

Too cheap?

Clive Black, a director at investment group Shore Capital, has batted around the idea that consumers, in the UK at least, don’t pay enough for our food, an observation shared by Charlie Bigham, the founder of the higher-end pre-prepared-meals supplier in London.

Black envisages the battle to cap global warming at 1.5°C  and the road to net-zero emissions will come at a cost to the consumer, with meat and dairy at the forefront, and arable crops to a lesser extent. And he throws in a bid to regenerate soil, a clean water environment, fewer pesticides and more biodiversity to the equation, all of which will need paying for through investment.

“If you look at the broader structural processes, where are we going on animal welfare standards? What does that mean for the cost of proteins? Where are we going on the sustainability agenda? What does that mean for the cost of production?” he asks rhetorically.

“I think there is an upward trajectory there. We were on a journey already whereby if society wants the food to be made in a way that is consistent with those processes, then we’re not going to be able to sit at 9-10% of household income being spent on food.”

Bigham agrees, arguing 10% is relatively small compared to other parts of Europe. He compares it with around 20-25% that UK consumers spent on food in the 1970s, suggesting food inflation has been relatively benign over the past 30 to 40 years, running around 2%. “We’ve actually had no food inflation at all since 2008. So we’ve got 14 years of pent-up food inflation,” he says.

The branded prepared-meals business owner adds: “At some point, we’ll find ourselves in a position where there’s a new rebasing of price, and consumers will have to get used to that and make changes if we think changes need to be made to our spending habits when it comes to food.

“I think there’s going to be a period of transition as we get used to these new prices. The journey to net zero is going to be a big chunk of responsibility for getting there, both in the UK and globally, and is going to fall on the food and agricultural sectors.

“These sorts of changes are never free – it’s very important for the planet, our children and grandchildren and generations to come that we make these changes, but they’re going to be expensive. And all of us as consumers are going to have to pay for them.”

Above-average inflation

Thijs Geijer, a senior economist at Dutch financial services firm ING, said food-price increases averaged 2% a year in the EU and the UK, from 2005 to 2020. Fast-forward to the first five months of this year, prices were rising on average at around a 7-7.3% pace in the EU – and 6% in the UK, he says, notwithstanding the latest annualised 8.7% rate announced by the Government for the month of May.

Geijer doesn’t expect a sudden dramatic fall in food prices either once the eastern European crisis is resolved, whenever that might be. "Before Russia invaded Ukraine, prices had been rising for a year and a half, and energy prices, for example, were also already increasing last year,” Geijer says.

“If you look at history, there are certain periods where food prices decreased a little bit. If you look at periods in the past where food prices increased by maybe 5% or 6%, it was not like the next year they decreased again by 5% to 6%.”

He adds: “In the current environment, with food prices increasing by much more than we're used to, that can be really detrimental for the shift towards a more sustainable product range on the shelves.”

Geijer’s colleague at ING, Kiran Sanchit, managing director and head of food and agriculture for the EMEA region, says food manufacturers are getting accustomed to the prospect of longer-term higher prices, whether it be connected to wars like in Ukraine, adverse weather events or the sustainability agenda. And consumers might just have to get accustomed to the prospect.

Sanchit explains: “Let’s assume such a thing can happen every five or eight years or something like that, not a war specifically, but let’s say an event. And then you have climate events that are increasing in frequency, so we have more uncertainty about yields.

“That basically drives up the price of food and we can ask ourselves, ‘do we pay too much for food now’? Or you could also say we are used to paying not enough for food if you take into account the real costs – economical but also environmental.”

“Green inflation”

Green inflation is becoming an increasingly common term to describe the inevitable impact on the cost of food production – and prices – of embracing sustainable practices to help tackle the climate crisis.

However, ING’s Geijer makes the pertinent point it only applies to the West, with food security in the Middle East and Africa, and to a lesser degree in Asia and Latin America, a more pressing consideration.

“We have to make a distinction between the western part of the world and places in the world where there's still food insecurity because there, sustainability is not a topic at all – people need food and they need basic food,” he says. “There'll still be an outlet for food that is not sustainable, that is not organic that is non-biological, whatever.”

Nevertheless, those regions are often reliant on imports, whether due to a lack of resources, money or an unfavourable climate.

But back in the West, the cost of fertiliser is rising, linked to the Ukraine crisis, resulting in a trickle-up price effect through the food supply chain. It could be a wake-up call for farmers and growers to cut the use of fertilisers, a key component of greenhouse gas emissions, namely carbon dioxide and nitrous oxide. However, that would come at a cost to the consumer, too.

“If we lower the use of fertilisers to lower greenhouse gas emissions, that means yields will come down unless there are other technologies that can improve the yields – but those aren't there just yet,” says Cyrille Filott, a global strategist for consumer foods, packaging and logistics at Rabobank, the Dutch investment bank.

Any introduction of counter emissions measures, such as a carbon tax or carbon credits, would further push up costs, particularly in the meat and dairy sectors, he suggests.

“If you are working to change animal protein, for example, farming practices, that's not going to come for free,” Filott says, adding the sustainability push would be felt throughout the supply chain.

“Sustainability efforts by many companies, many supply chain players, that will come as an investment, whether it is Scope 3 emissions reduction, whether it's improvements in biodiversity, you name it, investments are required, which has to trickle down to the consumer.”

The commodity question

Meanwhile, Mizuho’s Baumgartner points to another immediate and long-term cause and effect, ammonia, which is a by-product of natural gas and is used in the production of fertiliser.

Rising costs of all those components will increase expenses for farmers planting corn or wheat, for example, he says, suggesting they might cut back with a resultant impact on yields.

And fuel is another, Baumgartner explains. “You've got diesel transportation from the farm to the factories, diesel transportation from the factories to the warehouse, diesel transportation from the warehouse to the grocery store. And you’ve got packaging – plastic packaging is ethylene-based, from the petroleum complex, or even just corrugated cardboard that's got waxing on it.

“If policymakers are gung-ho about phasing out fossil fuel, there's going to be reverberations across the food supply chain.”

Black at Shore Capital argues we could get a bout of food deflation if the Ukraine crisis subsides, likely spurring a decrease in the cost of grains, proteins, oils and energy. However, the prevailing wage inflation, and in the case of the UK, a labour shortage linked to Brexit, will be a headwind.

“Wages and salaries aren't going to go down anytime soon,” Black argues. “They may plateau after a period but that element of the supply chain cost basis absolutely has gone up, probably on a pretty permanent basis.

“If there was a settlement between Russia and Ukraine, the oil price would come down materially, and that element of things probably would start to be featured in matrices and supply agreements between manufacturers and retailers.”

However, Black echoes the fears of commodity watchers of any adverse weather impact on the Northern Hemisphere harvests, which would set off another round of price increases before the full impact of inflation has actually been felt. A swathe of Europe, for example, is in the midst of an extremely hot-weather event, unseen for many years in some countries, with little rain to generate crop growth.

“This is an unprecedented situation,” Sara Girardello, a commodity analyst at UK consulting firm LMC International, says of the inflationary environment playing out. “Even if the war ceased tomorrow, it would take a long time for the infrastructure to be rebuilt and the flow of goods to be resumed and this lengthens the period for which we expect high prices.

“The situation is compounded by concerns around the condition of winter wheat crops in key exporting countries in the Northern Hemisphere and of the second corn crop in Brazil. Because corn and wheat are annual crops, prices will remain very high for at least another crop cycle of 12-18 months.”

For now, the focus is on Ukraine and Russia, and the causal effect on commodities, fuel and food, with a watchful eye on the weather and harvests. But it seems inevitable that consumers will have to brace themselves for allocating more of their household budgets to pay for sustainable food.

“If you look at the sustainability bucket, there’s increasing talk of the true price of food and in trying to find a way to compensate not only for the financial cost of growing food, but also the environmental cost or other sustainability factors,” Filott says.

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Free eBook
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Increase productivity and reduce costly staff turnover

In an industry with an average productivity gain of 2.5% a tech solution can help manufacturing firms realize productivity gains of 22% year over year. The labour shortage isn’t going anywhere, but it doesn’t have to be a productivity – or a talent – shortage.
by Redzone
Enter your details here to receive your free eBook.

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