Amid long-running challenges such as consumer price inflation, rising energy costs and labour shortages, Britain’s food industry has of late faced another snag: the fall in value of the pound.
And this currency weakness could “add greatly to costs”, says Gary Lewis, president of the National Edible Oils Distributors’ Association.
While sterling has bounced back slightly after falling to a nadir of £1.03 against the US dollar on 26 September, after former chancellor Kwarteng’s disastrous mini budget, the fluctuations mean businesses “need to re-forecast all the time”, Lewis adds.
The pound also dipped last month against the euro, though not as sharply as against the dollar. But it has remained at its lowest against the euro since January last year – the month after the UK and EU agreed their post-Brexit trade deal.
At the time of writing, a pound was worth $1.13 and €1.16, the latter up from a recent low of €1.11 on 25 September. By comparison, on 15 October last year the pound closed at €1.18 and $1.37 respectively. And on 28 February 2020, shortly before the UK and most of the world were put into Covid lockdown, the pound was worth $1.28 and €1.16.
So how has the collapse in the pound affected UK food businesses?
Walter Zanre, CEO of Filippo Berio UK, says he is “pessimistic” the pound will bounce back before next year, even against the euro. “This will add to inflation,” he says.
“Fortunately, I only have to work with the pound-euro exchange rate. I think the situation is going to be even worse for companies trading dollar denominated commodities.”
And the dollar’s recent surge is unlikely to be reversed “any time soon”, according to a recent report by S&P Global Ratings, which contained a stark warning. “For both advanced and emerging economies, the dollar’s outsized strength triggers several problems, including higher imported inflation and the potential for higher rates, capital flow volatility, and higher debt service on US dollar liabilities”, S&P explained.
Tesco chairman warns of increasing pressure on households
Dutch bank ING said last Thursday that a new 40-year high for US core inflation meant more interest rate hikes were likely soon, which in turn would further strengthen the dollar.
The food trade is feeling the effects of the soaring greenback, says Qu Dongyu, director general of the UN’s Food and Agriculture Organization. Last week Qu told a meeting of G20 finance and agriculture ministers that “the weakening of many national currencies against the US dollar is also contributing to increased food imports”, meaning countries are “buying less food, but paying higher bills”.
HMRC data for 2021 showed 93% of non-EU imports in the ‘animal and vegetable oil, fats and waxes’ category as invoiced in US dollars – making it by far the “most used currency” for the UK’s overall goods imports from outside the bloc. A currency breakdown for UK imports from the EU was not available, as these were recorded under the EU’s Intrastat system, which does not include details by currency.
The official numbers showed that just over 52% of total imports under the food and live animals category were in dollars, with 32.9% in pounds. Given that before Brexit, the UK imported almost half the food consumed in the country, with around half those imports coming from outside the EU, a rough estimate derived from the HRMC data would suggest up to a quarter of the UK’s food supply was bought in dollars.
Export opportunities?
“Put simply, it [the weak pound] will make things more expensive to those importing”, says Ged Futter, founder of The Retail Mind and a former buying manager at Asda/Walmart. But, he points out, a weak currency is usually a bonus for anyone with goods to sell overseas.
“Let’s put it this way: it doesn’t hurt,” adds Peter Hardwick, trade analyst at the British Meat Processors’ Association, assessing how the weak pound could help exporters of British beef and lamb.
Meanwhile, Rich Clothier, whose Wyke Farms exports cheese to about 150 countries, says: “In its raw form, the weak pound means more for exporters.”
HMRC data shows the pound and dollar both accounting for 33% of British goods export transactions in 2021 – including those to the EU. Some 15% of the UK’s goods exports transactions were denominated in euros, rising to 27% for the food and live animals category but dropping to just over 10% for beverages and tobacco.
Almost 9% of UK exports of food and live animals were invoiced in US dollars, rising to 12.9% for the beverages and tobacco category. For the animal and vegetable oils, fats and waxes category, both euro and sterling were around 20%, with the pound the currency of choice for almost 40% of food and live animal exports and almost 50% of beverages and tobacco.
But the downside to depreciation of the pound, however, was that it could see importers of UK-sourced goods haggling for a better price – or, as Clothier puts it, “using it as negotiating leverage”.
“In my experience the market knows you can charge less and therefore they seek a lower price”, says Hardwick, discussing exports to the EU, where the euro has also fallen against the dollar.
Food industry insiders list other caveats for exporters – particularly of finished goods, including processed food – which often first source raw materials such as rice and inputs such as machinery from overseas.
And with the industry among the many sectors of the economy facing a tight labour market, the weak pound is unlikely to help in attracting foreign workers, whose earnings in the UK mean vital remittances for family at home.
Food banks warn government they are ‘overstretched and exhausted’
“A weak pound means labourers are sending less money back, it’s a reason for them to look for work elsewhere,” says Clothier.
Even the leading voice representing the scotch industry, source of the UK’s biggest food and drink export, gives only a qualified welcome to the weak pound – despite the fact it will make scotch even less expensive in the US, usually the biggest importer of scotch.
“The industry looks at the pressures facing the economy in the round not just through the lens of the current currency fluctuation”, says a spokesman for the Scotch Whisky Association. “The pound is only one part of the story”, he adds, listing “increasing energy, supply chain and distribution costs” as significant challenges to distillers.
It’s a similar story in other sectors, where, as with scotch, currency concerns are but the latest in a litany of trade and supply chain challenges that have bedeviled food businesses for at least a year.
That includes in countries that supply popular Fairtrade-label coffee and bananas to the UK, says Anna Barker, head of responsible business at the Fairtrade Foundation. “Farmers everywhere are facing similar supply chain challenges,” she says.
KTC, where Gary Lewis is head of business, oils and fats, had to pause sunflower oil production for several weeks after Russia invaded Ukraine, the world’s biggest sunflower exporter.
And recent droughts in Italy and Spain have fuelled warnings that prices of olive oil could hit record heights this year, which Zanre says would be “a disaster”.
So while the currency volatility is a worry for some food and drink businesses, the raft of other challenges they are facing means it may not be the most pressing concern. At least not yet.
