Email Opt In:
To contact us, please use the form on the left or get in touch using the details below:

The Old Malthouse | Mill Lane | Box | Wiltshire | SN13 8PN

Food Inflation Forecasts

17 August 2016
written by : Alastair Cupper, Buyer

One of allmanhall’s buyers, Alastair Cupper, has taken a closer look at food inflation forecasts, with this detailed analysis…  

 

Download the PDF of this blog post here 

 

At the start of July, Mike Meek wrote a thought provoking blog about how organisations, particularly those in the food sector, have used historic CPI trends to forecast food inflation and the misrepresentations that can occur, especially when it comes to the food industry.

 

There have been numerous examples over the last couple of months of how varying factors can affect the often volatile food industry. Changes in global demand and supply of key commodities have exerted upward pressure on food prices and, as a consequence of the EU referendum, fluctuations in exchange rates have weakened the value of the UK Pound. It is certainly an enthralling time for those involved in the food industry; forecasting food inflation this year could be as interesting and unpredictable as it was leading up to 2008 and 2011.

 

Exchange rates play a significant role in the ongoing price of food, and forecasting currency exchange rates can be notoriously difficult, due to the number and variability of economic and geo-political factors that influence them…

 

But why are exchange rates important when analysing the UK food industry?

The UK is heavily reliant on the EU for food, with approximately 27% of food being sourced from the EU. The latest DEFRA annual report on the UK Food Industry declared that the UK imported circa £38.5bn worth of food, with approximately £10.4bn sourced from within the EU. Since the beginning of 2016, Sterling has devalued against the Euro by approximately 13%, resulting in the UK potentially paying up to £1.4bn more for imports from the EU.   

 

 

The graph below emphasises the uncertainty when forecasting GBP-Euro, with leading experts displaying diverse views on the exchange rate forecast for 12 months’ time. The general consensus from a majority of experts is that the Sterling debasement is set to continue throughout the year and well into 2017. As a consequence, not only will the price of imports increase, but the £18bn worth of UK exports of domestically-produced goods could rise, as they represent better value for overseas buyers. 

 

For the past 18 months, prices in the dairy industry have remained low, though we are now seeing signs that this position is changing. The removal of the Russian export ban and the weakening of the sterling have increased European demand for UK dairy produce.


The Agricultural and Horticultural Development Board anticipates that UK milk production will be lower than in previous years. With domestic demand remaining constant, but global demand increasing, dairy prices are set to increase over the next 12 months. As supplies tighten and projection in stocks decrease, UK milk prices are set to rise.   

 

 

To provide a more accurate overview of food inflation for the foodservice sector and to compliment our forecasting models, allmanhall have developed the WPI (Wholesale Price Index). This model, based on food marketplace prices, depicts the foodservice industry and is a supporting tool that can be used in conjunction with CPI to offer insights of likely inflation experienced within the foodservice sector. This will help to identify and counterbalance any factors, such as the supermarket ‘price wars’, which may distort CPI. By taking the base point for both CPI and WPI at August 2015, the graph below displays how the extremely competitive food retailing marketplace has helped to reduce food prices to a greater extent than those possibly experienced within the foodservice sector. 

 

 

 

 

The allmanhall WPI tool is constructed from a comprehensive range of catering products which are representative of a standard foodservice basket. By predicting likely future trends of a number of key commodity lines, a more accurate forecast of future price inflation can be given...

 

A few market updates are given below:

 

 

  • In the last month, Brazilian coffee prices have increased by 5% with predictions of further increases; poor weather conditions in Brazil will result in a more meagre harvest and reduction in global supply. This, combined with fluctuations in exchange rates, has seen prices dramatically increase, the effects of which are shown below
  • Reduction in global supply, predominately from an algae outbreak in Chile and increased demand from both America and the Far East, have resulted in increases in the price of salmon. The Financial Times published predictions from Norwegian Brokers who are anticipating a 60% increase in price. In recent weeks, there has been stability in the market, with Norway producing 50,000 tonnes more salmon to meet demand; however, prices are likely to remain high until towards the end of 2017.  

 

  • To add to the inflationary pressure of the weakening Sterling, key growing areas in France, Belgium and the Netherlands have been affected by adverse weather conditions. This has consequently limited supply, quality and yield, resulting in a very poor harvest and upward price pressure on many frozen vegetable product lines

 

 

There is a degree of certainty that food will inflate over the next 12 months, but calculating the level is inevitably challenging. The long-run elasticity of UK food prices is determined by 5 key factors: world food commodity prices; exchange rates; labour costs; domestic demand, and oil prices. Whilst another factor, domestic producer prices, are highly significant in the short run elasticity of food prices. Increasing price trends in these categories will have a knock-on effect on UK food prices. Extensive research conducted on behalf of DEFRA shows that the length of price recovery time is proportionate to the duration of the food spike. In 2008, there was a significant spike in food prices, but this was a temporary spike and prices soon recovered. In 2011, there was a smaller spike in food prices, albeit still of significance. As the duration of this spike was sustained, there was a more permanent effect on UK food prices, which took a notably longer period of time to recover.

 

This is an important factor to take into consideration when analysing the current increase in food prices. If food prices have a sudden but short-term shock, the knock-on effect on UK food prices should be smaller, whereas if this increase is set to continue at an increasing rate, then the recovery of food prices could last several years. 

 

 

 

When forecasting WPI inflation for the next 12 months, there is the assumption that, whether this is a short or long term shock on pricing, UK food is set to inflate during the next 12 months. This inflation could be a sudden shock in price, which will plateau throughout the year, or a steady rise which could have a greater effect on food prices, and impacting for up to 36 months’ time.

 

Expertise is fundamental to the success of managing and mitigating price fluctuations over the next 12 months. At allmanhall, we are consistently analysing the ever-changing marketplace to maximise the benefit to our clients and ensure that their pricing remains highly competitive.

 

To find out more about future market trends and how allmanhall can support your procurement needs, please get in touch. 

 

Download the PDF of this blog post here 

 

Read more like this: 

Plotting Potato Prices 

Foody Financials
Meaty Facts and Figures

Forecasting Food Inflation

 

 

Email Opt In:
To contact us, please use the form on the left or get in touch using the details below:

The Old Malthouse | Mill Lane | Box | Wiltshire | SN13 8PN