Rising energy and other input costs are putting pressure on food manufacturers and government plans for intervention may not be enough, according to the latest report by the Food and Drink Federation (FDF).
FDF said that the UK food industry had been through “three structural shocks” over the past six years. It cited global pressures and staff shortages as the reasons for manufacturers paying more in input costs.
Other findings of report include:
- Prices of global agricultural commodities have fallen in recent months. However, in August, they remained 42% above their pre-pandemic level, with cereal prices 48% and vegetable oils prices 75% higher
- Fertiliser shortages raise concerns about crops in the next year, so it’s likely that agricultural goods prices will remain elevated for a while
- Sterling depreciation is having an impact on trade, as many commodities including fertiliser and oil are traded in US dollars. The pound lost 13% of its value against the dollar in August, which effectively means everything traded in dollars is 13% more expensive to UK manufacturers.
According to the report, the UK manufacturing sector grew by 0.1% in July, although manufacturing of food had a negative contribution to growth. FDF claimed that, as the country has been contending with double-digit inflation at a 40-year high and soaring energy prices, the economy has lost its “growth momentum”.
The report said that the new fiscal stimulus announced by the Prime Minister in the form of a cap of £2,500 on the average annual household energy bills for the next two years and support (details are yet to be finalised) for businesses for the following six months might prevent a severe downturn.
FDF claimed that the capping of energy bills will bring some relief to households. However, it added that the cost of living crisis will continue.
It said: “The current energy cap is still more than double compared to 2019 or 2020, food inflation is likely to remain in the double-digits until mid-2023, while inflation will continue to outpace pay growth, eroding real incomes.
“The energy intervention will slow down inflation in the short term but boosting demand will raise inflationary pressures in the medium term, which might prompt the Bank of England to raise interest rates higher than it would have done otherwise.”
It said: “In short, the resilience of the industry has been eroded. Against this backdrop of intense pressures, gas prices have been rising by 400-500% on the year. Hence, government support with energy bills is critical for the very existence of many of our members.”
