Brexit is likely to hike the price of imports and labour, but other factors such as the US-China trade war and El Niño will have a big impact, too.
Just days before Greggs launched its now-infamous vegan sausage roll, the high street eatery hiked prices across its menu, citing inflationary pressures. Despite some initial outrage from customers, the move was all but forgotten in the ensuing furore over its Quorn-based pastry snack - which even saw a pro-Brexit protest outside a Greggs branch in Manchester mistaken for an anti-vegan sausage roll rally. But as the UK hurtles towards the March deadline for exiting the EU, could the 10p added to Greggs bacon baps be a harbinger of things to come for food prices in 2019?
Although much remains uncertain about Brexit ahead of next Tuesday’s vote in the House of Commons, experts agree the cost of importing food would rise if the UK crashes out with no-deal. Not least because of the impact it would have on sterling, with City investors warning the value of £1 could slump below €1 in a no-deal scenario.
“As the UK is heavily dependent on imported food, any further losses in the value of sterling would naturally raise costs as import costs go up in pound terms,” warns Kona Haque, head of research at agricultural commodities merchant ED&F Man.
Over half of the UK’s food is currently imported, with 30% coming from the EU and another 11% coming from non-EU countries under the terms of trade deals negotiated by the EU, according to a paper published by the House of Lords.
In a no-deal Brexit scenario, those foods would be subject to tariffs averaging 22% from March 19 2019, it warns, which would clearly have an impact on the cost of imported food.
The government has hinted it might cut tariffs on EU and non-EU imports to shield Brits from price rises, but that would ‘pose a serious risk of undermining UK food producers who could not compete on price’, the report notes. Non-tariff barriers such as extra border checks and delays would also add to the cost of imported food, it adds.
At the same time, domestically produced food faces separate Brexit “headwinds”, notes Haque. “A lot of the energy, machinery or labour involved in growing food is likely to go up in terms of costs,” she says. “The costs of importing gas or crude oil to run tractors or process food in factories would rise. Equally, if EU migrant labourers start to abandon the UK, farmers will struggle to get staff to help at factories or on farms.”
A no-deal Brexit would also hinder UK food exports to the EU, which might result in more British food becoming available for domestic consumption. However, this wouldn’t necessarily lead to a harmony in supply and demand. The UK’s trade in pork with the EU, for example, is “really important for carcase balance”, says AHDB analyst Bethan Wilkins. “A lot of ex-breeding sows are sent for processing in Germany because we don’t have demand for that type of meat in the UK, or the processing capacity,” she adds.
So trade barriers between the UK and EU might result in a shortage of popular pork cuts such as loins at the same time as an oversupply of less popular cuts such as shoulder and belly, which would hinder farm profitability and potentially lead to a decline in domestic production. With the British beef and lamb industry facing similar challenges, there could be longer-term consequences for domestic meat prices in post-Brexit Britain, experts warn.
And Brexit isn’t the only political factor threatening to bring volatility to food prices in 2019 and beyond. “The US-China trade war is another big political driver,” notes Stefan Vogel, global strategist for grains & oilseeds and head of agri commodity markets at Rabobank.
Last year, the trade conflict between China and the US weighed down on global food prices, which “generally trended lower” than in 2017, notes Haque. “Much of the grains and oilseeds complex saw its supply/demand fundamentals weighed down by negative sentiment surrounding the US trade war with China, which led to a sharp drop in US grains exports as demand from China suffered,” she says.
However, prices have begun to rebound since US president Donald Trump and his Chinese counterpart Xi Jinping agreed to a 90-day truce at a summit in Buenos Aires in December, and “the market is hopeful a solution will be found during trade talks this week”, says Vogel.
If the two nations can resolve their differences, there is a possibility global food prices will see some uplift in 2019. “The resolution of the US-China trade war would be a positive boon to food prices as it would mean China would re-emerge as a major importer,” Haque says.
With many agri-commodities traded in dollars, the direction of the US dollar will be another “major influence” on food prices this year, she adds. “Any weakness could help lift prices.”
Then, of course, there is the weather. Last year, the Beast from the East and the heatwave had a dramatic impact on UK fresh produce supplies, as well as the availability of forage and feed for livestock. With supplies of many domestically produced foods still tight, any repeat of such extreme weather this year would further push up costs, experts agree.
Globally, food supplies are in pretty good shape, but the return of El Niño could pose a threat. Currently, there is a 70%-90% chance of the weather phenomenon taking place in 2019 and while “expectations are for a relatively moderate impact”, there are still “a lot of different products that could be impacted negatively in terms of supply”, Vogel warns.
If El Niño-like weather patterns do emerge over the next few weeks, “we would expect to see drier weather in Australia, Central America, southern Asia and south-east Asia”, says Haque. This could impact yields in palm oil as well as other tropical crops such as sugar and cocoa.
Amid so much political and meteorological uncertainty, it’s hard to paint an accurate picture of what will happen to food prices in 2019. But two things are for certain - grocery is preparing for a return to volatility, and consumers should brace themselves for higher prices at the checkouts.
Commodity predictions for 2019
Sources: AHDB, Rabobank, ED&F Man
Crude oil prices hit a four-year high last year, peaking close to $87 a barrel amid panic over Trump’s Iran sanctions. However, prices have since fallen, and Goldman Sachs recently downgraded its oil price forecasts for 2019, citing good global stocks and slower than expected demand. It now expects Brent crude to average $62.50 a barrel, down from a previous forecast of $70.
With demand for beef declining and production stable, prices could dip in 2019, says AHDB analyst Tom Forshaw. Lamb supplies, meanwhile, could be tight in the first half of 2019, with 7% fewer lambs carried over following the Beast from the East, and less New Zealand lamb available for export. However, Brexit could have a big and as-yet unknown impact on prices for both red meats.
UK potato prices remain at “historical highs” as a result of tight supplies following last year’s drought, says AHDB analyst Aidan Wright. “Prices throughout the season are likely to remain relatively high and will be influenced by the rate at which new crop supplies enter the market at the tail end of the season.” And that will mostly depend on what happens with the weather this year, he adds.
After falling sharply in 2018, sugar prices are “due to recover in 2019”, says ED&F Man’s Kona Haque. Low prices last year helped deter cane crop and beet crop expansions in areas like Brazil, Europe and India, which should bring the market closer to balance. However, the price of crude oil will be an influence this year as Brazil’s production will depend on the sugar/ethanol parity, she adds.
Coffee prices should recover a “little” in 2019, says Haque. Last year’s low prices meant Central American coffee suppliers had no incentive to expand crops, and Brazil will harvest the lower-yielding crop in its biennial cycle in 2019. The Brazilian real is also set to strengthen with the arrival of new president Jair Bolsonaro, which would also support higher coffee prices, she adds.
The US-China trade war will play a major role in soy prices in 2019, but the weather in Brazil could also have an impact, notes Rabobank’s Stefan Vogel. “If the weather continues to be dry in Brazil we will see yields continue to decline, which would support prices,” he says. El Niño could also bring some dryness to the US soy-belt areas, though stocks remain high.
Cocoa prices fell in the latter half of last year as a result of “quite large” 2018/19 crops in West Africa, says Rabobank’s 2019 Outlook report. However, low prices in key producing countries and the return of El Niño “could endanger cocoa production” this year, it warns. Rabobank predicts there will be a global deficit of cocoa in 2018/19, which should push up prices.
With global stocks still under pressure following last year’s drought in Europe and lower-than-anticipated production elsewhere, wheat prices are likely to remain high, and could even climb further, in the first half of 2019, says Vogel. “However, we expect that as from summer, wheat supplies globally will be fairly good which will allow prices to decrease again,” he adds.
UK pork production is set to increase slightly in 2019, but the outlook for prices remains uncertain, says AHDB analyst Bethan Wilkins. Not only is Brexit a big unknown, but the spread of African swine fever to China is causing “a lot of uncertainty on the global market”, she adds. There is also a risk ASF could spread further into Europe, which would have a more direct impact on prices.
Palm oil prices are set to come under further pressure this year as a result of continued oversupply, according to Rabobank. Global palm oil production in 2018/19 is forecast to increase by 3.3 million tonnes, to 72.6 million tonnes, on the back of production increases in Indonesia and Malaysia, it notes, though a severe El Niño would add some upward pressure to prices.Brexit is likely to hike the price of imports and labour, but other factors such as the US-China trade war and El Niño will have a big impact, too.