The people of Britain have voted to leave the European Unit, or “Brexit” in a historic referendum on Thursday, June 23. The “out” campaign won by a small majority of 51.9% with an overall turnout of 72.2%, or 30 million people, making the EU Referendum the highest turnout in a UK-wide vote since the 1992 general election.
The outcome has prompted jubilant celebrations among Eurosceptics around the UK and sent shock-waves through the global economy. Markets have suffered a rough couple of weeks following Britain’s stunning vote to leave; investors around the world revolted by dumping sterling and other assets tied to the British economy and piling into traditional safe-havens, such as gold and the Japanese yen.
During the first two trading sessions following the referendum, sterling plunged 11%, the biggest drop since the pound floated in 1971 and there are now fears that the pound could reach parity with the Dollar if the falls continue, something it has never done. Currently the £ stands at $1.31 which is a drop of 7% since the referendum result, the € is still fluctuating and at the point of writing this paper currently stands at €1.20 down 8%.
The question people will be asking is how will this uncertainty affect my food prices? This needs to be split into two sections, the first being the short term which this paper will try to cover and the second being the longer term which, at this stage, cannot be guessed as this will depend on the deal negotiated by politicians and civil servants once Britain starts its formal exit process.
As far as total trade goes, the EU is the UK’s biggest trade partner for both exports and imports. In March 2016, 48% of total UK exports went to the EU and 51% of UK imports were from the EU. Europe needs the UK just as much, however, as the UK is the 4th largest importer of EU products and the 5th largest exporter into the EU.
When it comes to just food and drink products there is a heavier reliance, with 61% of UK food exports going to the EU and over 71% of our total food and drink imports coming from EU countries.
The Netherlands is the top EU exporter to the UK, with 19% of EU food imports. Add in France (17%), Ireland (14%), Germany (11%) and Spain (10%) and together these 5 countries supply over 70% of the UK EU food imports.
Dry and Frozen
The majority of dry and frozen contracts are negotiated by wholesalers at the back end of the year traditionally during peak harvest periods. 2016 has not been a great year for produce, with severe weather being seen throughout the Spring and early Summer across Europe. The Bidvest negotiation is just beginning and we have received their initial proposal, this is still a long way from being finalised but there are increases being proposed on key commodities such as:
- Potatoes – chips & hash browns
- Chopped Tomatoes
- Tinned and frozen sweetcorn
Currently there appear to be no movements on lines such as baked beans and tuna and decreases on butter and cheddar cheese.
Some of the movement indicated above will be a mixture of currency movement as these are nearly all traded in $ or €, commodity movement from when the contract was secured in September 2015 overall business and distribution cost increases. It is worth noting that since the last price review in March a new minimum wage and pension provision has been introduced by the Government and fuel has also increased from an average of £1.03 in March to an average of £1.11 for June an increase of 7.7%. The true basket movement is not yet confirmed and we will be working hard to keep this as low as possible but this could be between 2-4% depending on the product mix.
As a net importer of meat – some 2 million tonnes were imported into the UK last year – the vote for the UK to leave the EU immediately raises questions for the meat industry.
The EU is the UK’s main meat trading partner. Over 80% of Britain’s imports came from the EU last year, with the Netherlands, Ireland, Germany and Denmark our main suppliers. Trade itself is not going to be interrupted by the Brexit vote in the short-term, although changes in the value of the British pound will affect trade.
The value of the pound fell swiftly in response to the vote outcome, and the uncertainty created by the vote is expected to place downward pressure on the pound through 2016. This means UK consumers should expect upward pressure on meat prices. Bacon is one such product that we are now starting to see movement on; the UK imports just under half of its bacon needs, and a large share of pork imports are locally processed into bacon. All of this comes from the EU (mainly from Denmark, Germany and the Netherlands).
Fruit and Vegetables
The dramatic devaluation of the pound in recent weeks will inevitably hit costs on imported fruit and vegetables coming into the UK. The majority of suppliers will be locked into contracts on key lines which will provide some short term protection, however there could be a knock-on effect when contracts are renegotiated which is generally September/October. Currently the market has now switched to mainly UK-grown produce which is providing an element of protection against currency fluctuations. Where imports are coming from Europe, currency is not currently the driving factor behind price movement. Many areas across Europe have been heavily impacted due to prolonged unfavourable weather conditions, heavy rains and hail during late May, throughout June and in early July. This year’s crop situation is the worst it has been in the last 40 years, with rainfall records for June broken in several of these countries: Belgium, the UK, France and (the south-east) of the Netherlands. A lot of crops are now behind where they should be and pricing is increasing as a result.
The UK spent over £2bn on imported dairy goods in 2015, while generating just over £1bn in revenue from dairy exports. As a result, the country has a negative trade deficit of around £1bn for dairy. However, when volume is then factored in, imports and exports were almost level in 2015. Around 60% of UK exports are milk or cream in liquid form, which have a lower value per tonne, whereas the majority of the UK’s imports was on higher value products such as cheese, butter and yogurts. Going forward, the impact of currency is going to heavily influence prices with costs effectively 8% higher than they were before the UK voted to leave the EU.
Over the past year the UK has enjoyed historically low milk, butter, cream and cheese prices as there has been an oversupply in the marketplace. Throughout 2015 farmers looked to reduce herd sizes by selling their cattle for slaughter which also helped keep beef prices low throughout 2015. The UK dairy cow herd is now smaller which has led to a y-o-y reduction in milk deliveries for the beginning of the 2016 spring flush. With a slowdown in milk production and increased demand from international markets, UK butter and cheese prices have risen more, not solely due to potential impact from currency fluctuations.
“Brexit” is likely to cast a shadow over the global trade in fish in 2016. As the fall in the pound continues, the UK’s purchasing power, as well as the value of our seafood exports, will diminish. The UK is a leading exporter of salmon as well as being a top 10 importer of fish and fishery products. Key species such as cod, haddock, prawns, tuna and wild salmon are traded in $, therefore any uncertainty around the £ is of paramount concern.
Farmed Salmon is the number 1 consumed seafood in the UK and is a major concern – although not as a result of the recent referendum result. Norwegian salmon prices increased 73% y-o-y in June and has followed an upward trend since the start of the year. This has been driven by decreased production, resulting from sea lice numbers and incidents of infectious salmon anemia (ISA), when the marketplace was already suffering from price inflation due to market shortages. Add to this the currency volatility and this will cause prices to rise further in the short term, potentially leading to some distributors struggling to maintain supply at a price the market is prepared to pay. All by-products of fresh salmon are also following the same price trend.
Over the past 2 years the UK has benefited from food deflation, however the UK economy is now entering uncertain times with the impact of the $ and €; this, along with environmental factors, makes the short to long term difficult to accurately predict. Since the result, markets have started to recover albeit slowly with the £ recovering around 3% of its initial loss against both the $ and the €. Predicting a % increase in the coming months is difficult with so many factors affecting the food we purchase. Taking all these factors in to account we believe overall food prices will increase in the next 6-12 months by around 2% to 3%.
The PSL buying team will be working not only with our direct supplies, but also further up the supply chain with growers and manufacturers to ensure any potential impact is minimised to the PSL client base.