UK consumers are struggling to cope with the worsening cost-of-living crisis. On Friday morning, Ofgem published the new energy price cap which sees the average UK household paying £3,549 per year for energy, up by 178% on the previous year. The sharp increases in energy bills are threatening to push many towards fuel poverty. But it is not only consumers, who are impacted by soaring energy prices. Indeed, farmers too have been severely affected as a result global and domestic developments. For example, prices for domestically produced ammonium nitrate shot up 29% in March to £839 per tonne as gas prices – integral in the production process for such fertilisers – spiked.1 Unable to bear the full brunt of rising input costs, farmers have, in turn, gradually passed on some of these costs to consumers. This is evident in the Office for National Statistics’ (ONS) latest data release, with the food and non-alcoholic beverages category seeing annual inflation of 12.6% in July, significantly up from 0.3% seen in August last year, and aggravating the cost-of-living crisis further.2
Food prices have been on an upwards trajectory since last year. A recovery in food demand as lockdown restrictions eased, along with disruptions in logistics, led to a surge in food prices in 2021, as farmers grappled with a sudden increase in demand and a shortage of agricultural inputs. The war in Ukraine only compounded matters further, given the vital role of Russia and Ukraine in global agricultural production. Yet, farmers are now wary of another emerging threat that threatens to hamper agricultural production and push costs up.
This summer has seen record-breaking heatwaves and unusually dry weather across the UK. Months of little rainfall have left rivers at exceptionally low levels, depleted reservoirs, and parched landscapes. Accordingly, the National Drought Group officially declared a drought in multiple areas of the UK. Our analysis suggests that the near-term impact of the drought on food security will be manageable. In terms of grains, the winter wheat and oat harvest for Great Britain in 2022 are estimated to be 92% and 79% complete respectively. With 90% of all types of grain (inclusive of barley, oats, and wheat) consumed in the UK produced domestically, the UK is set to have sufficient supplies of grain in the near-term.
The uncertainty, therefore, lies beyond the near-term outlook and in the 2023 harvest season. A drought hampers agricultural production processes by diminishing irrigation options, hampering the yield of crops, and limiting the amount of food available for livestock. On the latter, drier, hotter weather has made it harder to grow forage crops for livestock to feed on, resulting in farmers employing feed supplies traditionally reserved for the winter months now, placing upwards pressure on livestock costs at a time when price levels are already surging. Reduced available water options, along with drier soil, both consequences of the drought, have reduced farmers’ ability to maintain yet-to-be-harvested crops and plant new ones.3 Some of these effects are already showing; between April and July, the wholesale prices of red bulb onion (20.0%), brown bulb onion (29.7%), cauliflower (20.8%), carrots (34.1%), white cabbage (41.3%), beetroot (20.0%) and parsnips (55.6%) have each risen by at least a fifth, not least due to crops failing in light of record temperatures.4 Given the long timelines in growing and harvesting crops, it is likely that a drought-associated squeeze in supply will be witnessed next year. Indeed, while wheat futures scheduled for delivery in November 2023, have dipped in recent months, they still remain elevated above February 2022 levels, reflecting the gloomy outlook pertaining to wheat supplies next year.5
While the drought poses no immediate threat to food supplies due to the UK’s high degree of food security, a squeeze in agricultural production is likely to translate to higher costs for households. We expect these costs to be gradually transmitted over the second half of 2023, as the next harvest season begins. Considering this alongside the mounting cost-of-living crisis and rising energy bills paints a grave picture, with millions of households threatened to be afflicted by both fuel poverty and further rising food prices. Comparing the cumulative effect of strained supply-chains, the war in Ukraine, while also factoring in the impact of the drought, to our baseline forecasts from January 2022 provides a comprehensive picture of the increase in costs to UK consumers. Compared to our forecasts from earlier this year, we now expect households to spend an extra £1.1bn per month on food in December 2023, equivalent to a rise of £37.41 per month per household.6 While the worst of the heat may have passed and summer is starting to ebb away, the consequences of the dry summer will be felt for some time to come.
1 Agriculture and Horticulture Development Board (AHDB)
2 Office for National Statistics (ONS)
5 Intercontinental Exchange Inc. (ICE) – UK Feed Wheat Futures
6 Our estimates were calculated by utilising our inflation forecasts from January 2022 as a baseline scenario, and comparing this scenario to our current forecasts. While doing so, we also factored in the impact of the drought in our current forecasts. This was done using DEFRA’s research into the sensitivity of food inflation to wholesale price shocks. Subsequently, we employed a case study example of previous shocks, namely the 10% rise in global food prices after a summer of droughts in both the US and Eastern Europe in 2012. Accordingly, our estimates are based on the potential for similar rises in global food prices stemming from drought-related effects afflicting not only the UK, but the US and much of Europe as well.
For more information please contact:
Pushpin Singh, Economist Email firstname.lastname@example.org Phone 020 7324 2871
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