How will a fuel crisis play out in food & drink supply chains?

The Strait of Hormuz, through which roughly one fifth of the world’s oil and natural gas supplies usually pass, has now been effectively closed by Iran for nearly a month, following the US-Israel attack on the country in February. And a whirlwind of contradictory claims from US president Donald Trump and Iran this week have added no clarity to how long it will remain that way, with the White House unhelpfully describing the situation as “fluid”.

The price of bulk diesel has risen by 30% since the crisis began, according to the Road Haulage Association (RHA).

And already there has been talk of fuel rationing.

“The government will have to protect food supply, hospitals, schools, transport systems, and what that means… is effectively rationing,” Nick Butler, a former head of strategy at BP, told Times Radio on 16 March.

That is not the prospect yet. But with no end in sight, what could a worsening situation look like for food supply chains?

The Department for Energy Security & Net Zero stresses that petrol forecourts are well stocked and the UK benefits from strong and diverse security of energy supplies, with only 1% of oil imports coming from the Middle East.

Likewise, the Petrol Retailers Association says supply remains stable, though it is monitoring the situation closely.

Chris Elliott, professor of food safety at Queen’s University Belfast, cautions that immediate concerns over price and availability are a “short-term view”.

RHA policy and public affairs director Declan Pang warns hauliers will be unable t0 absorb sustained high fuel prices. “The annual cost of fuelling a single 44-tonne HGV travelling 75,000 miles a year is now over £61,000,” he says.

Read more:

• Iran war fuel price spike ‘will filter into food prices soon’, hauliers warn

• How Strait of Hormuz closure will impact global food & drink

• CMA warns firms it will act decisively against price gouging

“In real-terms that is about £326 to £350 extra per week. It’s a lot for HGV operators to absorb, particularly when you consider that most are SMEs and small businesses.”

The situation is “fragile” because haulage customers don’t accept price increases readily, which “has put a lot of companies under strain”.

“Rising costs have massively tightened margins, which were already wafer-thin before the Iran crisis,” he adds.

Those tight margins mean high fuel costs must “ultimately feed through into wholesale and retail prices”, says Logistics UK head of trade James Mills.

But a lag before that happens could restrict haulage capacity, which would quickly feed into availability in stores.

The food industry relies on a “just-in-time model”, notes Pang. “There’s very limited buffer. So disruption can have a knock-on effect quite quickly.”

Elliott says: “Generally, when we have a shock like this, the first thing we see are issues around fresh produce on supermarket shelves.

“The first sign of the problem is gaps in fruit and veg, and that could happen in a relatively short space of time.”

It would be a repeat of scenes of 2021, when a lack of HGV drivers sparked panic buying at the pumps and led to thousands of forecourts running dry. Wholesalers cancelled deliveries as the crisis impacted fleet capacity, leading to widespread gaps on shelves, particularly in fresh produce.

Barclays research in September 2021 found 46% of consumers reported seeing empty spaces on shelves and 18% had found it harder than usual to find fresh fruit and vegetables. A further 13% had also found it difficult to purchase soft drinks, frozen goods and fresh fish and meat.

Back then, the UK’s acute post-Brexit HGV driver shortage was the primary driver of the crisis, with oil companies maintaining there was no shortage at refineries and terminals. This time, the problems begin further afield. “The greater the cost of transporting means there is potential for some of that fresh produce that was destined for the UK to go to other, closer marketplaces,” says Elliott, adding to availability pressures.

Energy and fertiliser costs

Haulage capacity will not be the only pressure point, with energy costs also rising.

“A high level of concern is not just around the movement of food and logistics, but also cold storage, because it takes a lot of energy,” says Elliott.

And the pressure will extend up the supply chain.

British Apples & Pears last week warned the closure of Hormuz was impacting fertiliser supply chains, with natural gas accounting for 60%-80% of production costs, not to mention higher transport costs. One apple grower reported that fertiliser was 42% more expensive than the same time last year, with kerosene prices doubling from 65p to £1.30 per litre in recent weeks.

Elliott says: “If fertilisers are already more expensive, and these costs rise even more steeply, farmers will have to think about whether they borrow more or produce less.”

BRC director of food & sustainability Andrew Opie says existing contracts between supermarkets and farmers will provide some stability in retail prices, but warns this cannot continue indefinitely.

But BAP chair Ali Capper warns: “Growers can’t simply pause buying fertiliser, fuel and energy. If these cost spikes persist through the spring, they will feed directly into food inflation.

“The Groceries Code Adjudicator should remind retailers of the rules around cost-inflation discussions, so legitimate increases can be addressed fairly,” she adds.

Inflation

Food inflation stood at an 11-month low of 3.3% in February, according to new ONS figures this week – but the IGD has warned the Middle East conflict may send it as high as 8%, a level last seen in 2023.

That’s the pessimistic scenario, but even a quick resolution will mean food inflation rising to around 4.8% this year, IGD modelling suggests.

Similarly, Elliott thinks that even with a speedy resolution, “downstream consequences” including the higher fertiliser costs will likely impact prices for up to 12 to 18 months, and food inflation “could be in the 5%-10% range”.

FDF CEO Karen Betts says the industry is in a “calm before the storm”, but warns “the cost of the Iran conflict will be felt by shoppers this year”.

She has urged the government to provide more support for the growing sector, adding: “The current energy shock is yet another structural shock our industry will have to absorb, on top of the Ukraine war, the costs of realigning food law with the EU once again, and new regulatory burdens.”

Delivering a speech at an FDF dinner in London this week, Betts said the government should provide as least as much support as it is for other manufacturing sectors. “Despite ongoing concerns about food price inflation – a situation clearly now made worse by war in the Middle East – food and drink manufacturing isn’t receiving support on energy costs,” she said. “This has been promised to automotive, aerospace, to wind turbines and some others. But not to food and drink.

Read more:

• Could Iran war prompt a supermarket to introduce national fuel pricing?

• Iran war: soaring red diesel prices could threaten jobs and drive up prices

• PetrolPrices app downloads surge 500% amid soaring costs

• Ensus gets £100m government bailout to restart CO2 gas production

“This is because food and drink isn’t considered by government to be advanced manufacturing – although I struggle to understand how government thinks we feed 70 million people without being advanced manufacturers. Even small companies don’t make things by hand. 

“The partnership [with government] isn’t working well when car manufacturing is put ahead of food manufacturing, and in a crisis.

“We shouldn’t need to remind anyone that food and drink is an everyday essential,” Betts added. “Nor that, on average, people buy a car only every six to nine years.”

Richard de Meo, CEO of hedging fintech company Attara, warns that with no resolution in sight, fuel costs alone could add £1bn to business’s operating costs this year, while plastics and packaging costs are also surging as Gulf petrochemical exports stall. He say the UK is at “risk of entering recession” if oil prices remain high, with inflation breaching 5% by summer. 

Elliott notes PM Keir Starmer chaired a COBRA meeting on Monday on the economic impact of the conflict, attended by the Chancellor, senior cabinet members and the governor of the Bank of England. The focus was energy bills and protecting consumers from unfair price rises, rather than food supply chains.

For Elliott, this demonstrates a “major failing in really understanding the risks”.

Years on from the supply chain shocks of the pandemic and the 2021 HGV driver shortage, it seems important lessons are yet to be learned.