Certainly pressure from retailers to reduce ex-farm prices will have left a bitter taste in some producers' mouths, but at EFFP we're urging farmers to hold their nerve and keep their focus on the long-term opportunity.
Retailers are increasingly committed to domestic suppliers, in part through necessity and in part through strategic intent. Morrisons has committed to 100% British beef, lamb and pork, and The Co-operative Group has also pledged to ditch Danish and source British for all its pork and bacon. On the grain side, Sainsbury's is still dedicated to sourcing wheat for in-store bakeries direct from growers via the established Openfield tie-in announced last summer. These switches in buying strategies show commitment from the retailers and give farmers the opportunity for stronger partnerships and contracts. While the short-term gain for an export 'quick buck' is undoubtedly appealing, arguably there is much more gain to be had from long-term supply agreements in the domestic market.
We could easily see ongoing market volatility where agricultural commodity prices could peak again given the continuing tight global supply and demand situation. However, because of the slowing UK economy, retail food price inflation could be negative by the end of the year, from a position of being 10% higher in December 2008 than during the same period in 2007 according to EFFP's Retail Food Price Inflation Forecast. This largely reflects consumers' increased pursuit of value.
This difficult situation points to the need for all the players in the chain to build closer, more integrated relationships. This would not only benefit food businesses looking to secure raw materials they need, but also farming businesses with a desire to take back market share lost to food imports over the past decade through greater import substitution.
The combination of downward pressure on retail food prices with upward pressure on raw material costs could result in a vicious cost/price squeeze for many food companies, especially businesses struggling to absorb the higher prices they are paying for imported food. The food chain will want to do all it can to defend itself against this.
In the short term, food will account for a higher proportion of UK household spending, given falling incomes linked to the recession. Upward pressure on commodity prices, increased costs of imported food and consumers' demand for value will all have far-reaching strategic implications for the way in which raw materials are sourced and the food supply chain is managed.
Increasingly this is going to translate into competitive advantage for those food and farming businesses that can work together to reduce and manage these new supply chain risks. The situation reinforces the need for thinking more strategically about raw material supply and for building more effective collaboration between food companies and their farmer supply base. Through partnership, innovation and the ability to deliver value, UK food businesses could emerge leaner, stronger and fitter for the future.
Siôn Roberts is chief executive of English Farming and Food Partnerships