Food prices could rise within weeks – but the ‘big worry’ is that they won’t come back down
Food prices could rise within weeks if the Iran war continues and there is a “big worry” that they won’t come back down, a trade expert has told Money.
Rising shipping, insurance, fuel and energy costs, combined with cancelled flights, could lead to consumers paying more in stores, James Mills, head of trade policy for Logistics UK, said.
Despite the country having resilient supply chains, the Iran conflict has caused suppliers to re-route their stock, which makes the journey more expensive and causes delays.
Instead of going through main shipping channels, some suppliers are rerouting about 6,000km around Africa’s Cape of Good Hope, causing two-week delays and higher costs, Mills said.
Why impact could last months
The British Retail Consortium (BRC), a leading trade association for UK retailers, has warned that goods being redirected via longer routes could have potential knock-on effects on availability and prices due to higher shipping costs.
At the same time, fuel prices have been going up, with a barrel of Brent crude oil hitting more than $100 at times yesterday.
“If the conflict continues, people may notice that energy price rises continue and that feeds into higher transport and production costs and that gradually feeds into higher food prices,” Mills said.
“It will be weeks or months before things feed through.”
This is because most supermarket suppliers buy goods in advance, and will bulk-buy fuel to try to mitigate the risk of prices rising.
Perishable goods would be impacted the quickest, Mills said.
“I’d say fresh produce and those areas will probably be more sensitive to air cargo capacity being constrained. Anything that’s sensitive to energy markets will obviously be impacted by that as well.”
Andrew Opie, director of food and sustainability at the BRC, said: “There are also concerns about the effect on inflation and overall pricing if energy costs remain elevated for an extended period.
“We saw this following the Russian invasion of Ukraine when higher energy prices drove up manufacturing costs. Since energy is a significant component of our production costs, sustained increases directly impact the prices of the goods we sell.”
‘The bigger problem’
War risk insurance premiums have also risen, with Mills saying insurance for a $100m oil tanker has gone from $250,000 to $3m per trip.
And transporting goods via plane has also become more difficult due to the number of commercial flights that have been cancelled.
Mills said around 10,000 passenger flights, which can carry food and supplies in the belly of the plane, have been cancelled so far, reducing the overall cargo capacity.
While all of this is a concern, Mills said the “big worry” is how long the price increases last, and whether they will create a “new normal” price level for goods.
“Most people see prices going up, but are they going to stay the same and not come down? That’s the bigger problem,” he said.
“What we have seen in the past, especially since COVID, is they go up like a stone and come down like a feather.”
Opie said retailers and their suppliers are adept at managing this type of disruption and are working hard to minimise the impact on customers.
“It is more important than ever that government keeps other inflationary pressures within its control to a minimum to protect households,” he added.
What does all of this mean for British farming?
It’s not just imported food products that are affected by the conflict – British farmers are also feeling the effects of rising prices.
At a time when farmers are usually at their busiest planting spring crops, some may have to halt their plans due to the volatile fertiliser and red diesel costs.
President of the National Farmers Union Tom Bradshaw told Money: “It takes us back to the Ukraine situation where we saw this huge volatility and massive inflationary pressure in the energy markets.”
He said that fertiliser and fuel prices have been withdrawn from the market, meaning farmers don’t know how much they will be expected to pay, or if they’ll be able to place an order.
Around 35% of key fertilisers, like urea and ammonia nitrate, come through the Strait of Hormuz, which has been effectively shut by the war in Iran.
“The pure economics of crop production today are incredibly difficult,” Bradshaw said.
“This is going to be an incredibly challenging time for farmers, and without a shadow of a doubt, it’s massively inflationary.
“The challenge we have as farmers, particularly those that are producing commodities, is that we’re price takers.
“We don’t necessarily have the ability to put the price up and we’re going to need the whole supply chain to work together to try to mitigate the impacts of this.
“But inevitably the inflationary pressure is there in the supply chain now and it has gone through to the retail shelf.”
While arable farming is taking a hit, livestock farmers are also feeling the impact after a dry summer last year led to a fodder shortage.
“They buy their fertilisers more hand-to-mouth, so they normally order it a week or two or a month before they need it… they’re even more exposed to the market rising as it has done,” Bradshaw added.
The NFU is currently trying to weigh up whether the market conditions are exceptional enough to warrant government intervention to protect farmers from increasing costs.
“Last week, we were all hoping that it would go away and that the war would end pretty quickly. Unfortunately, today it certainly feels to me like this is going to be more of a medium-term impact, and our members simply cannot afford the cost increases that they’re seeing on farm,” Bradshaw said
“There’s real worry from members as to how they’re going to be able to continue purchasing the inputs that they need to produce the country’s food at a time of such volatility.”