Forecasting Eye

Summer 2018 has been one of the warmest in living memory, with above average temperatures recorded since April and dry spells lasting more than 50 days in parts of the country. While this has made Britain’s weather more conducive to barbecuing, it looks set to raise the price of the food on the grill and the drink in hand.

 

The summer followed a cold, wet and challenging winter. Though coping with the vagaries of weather is something that farmers are well accustomed to, the extreme weather seen this year has put particular stress on farming costs and yields.

 

Domestic food production has felt the effects, with wholesale prices for vegetables rising markedly. From March to July the farm gate price of onions (+41%), carrots (+80%), lettuce (+61%), wheat for bread (+20%) and strawberries (+28%) rose by a fifth or more each [1].

 

Dairy production had also suffered until recently, registering 11 consecutive weekly falls as the hot weather hampered grass growth. This has seen the farm gate price of butter rise 24% since March [1]. Even when grass growth returns to normal, the reduced grazing seen this year will have a lasting impact. Some farmers have had to turn to already depleted backup supplies to boost production, which will keep upward pressure on feed costs in the coming winter.

 

Though the heat has reduced the fertility of pigs and contributed to an 8% rise in piglet prices since March [1], the price of red meat is set to fall marginally in the short run. This is as farmers look to sell livestock earlier than normal to reduce the burden on grazing land. Still, in the longer run, prices are set to rise as feed availability is affected by a weak harvest.

 

Much of UK’s grain – used to feed livestock, as well as for numerous food products – is imported from Europe, which has also seen record high temperatures this year. Reserves have kept prices from spiking drastically thus far, but industry forecasts and futures prices point toward coming increases. Wheat, which features heavily in European and British shopping baskets, is a concern. The wheat harvest is forecast [2] to be down by 5% this year, and European wheat futures are currently trading around 30% higher than at the end of April.

 

There’s bad news for wine fans too, as severe hailstorms in the French wine regions of Bordeaux, Champagne and Cognac have eliminated millions of bottles of product. While the Champagne committee has stated that reserves will soften the blow for bubbly, in the Cognac basin at least a quarter of this year’s vintage has been destroyed.

 

With the wholesale price of many crops already rising very significantly and meat prices set to climb in coming months it seems likely that wholefood prices will rise at least 5%. Using Department for Environment, Food & Rural Affairs (DEFRA) research into the sensitivity of consumer prices to wholesale price shocks, Cebr estimates that the extreme weather will ultimately drive up the costs to UK consumers by £45 million per week. This is equivalent to a rise of £7.15 per month per household.

 

The DEFRA research suggests that commodity price spikes can take 18 months to fully feed through into inflation. So, while the worst of heat may have passed, the cost to consumers looks set to climb.

 

[1] Source: the European Commission  [2] by the International Grains Committee

 

Contact:  Christian Jaccarini, Senior Economist

0207 324 2865   cjaccarini@cebr.com