Ana Costescu
Assistant Head of Credit Underwriting
Allianz Trade UK and Ireland
Ana Costescu
Assistant Head of Credit Underwriting
Allianz Trade UK and Ireland
The food industry is a crucial sector that, despite facing various challenges, will always be a key component of the economy. Increasing costs for ingredients, materials, energy, and labor, inflationary pressures, the impact of the Ukraine conflict, andongoing post-pandemic challenges have been significant factors contributing to insolvencies in the sector. The recent rise in interest rates, the first in over a decade, has led to higher borrowing costs at a time when consumer spending is cautious, making refinancing more challenging and costly.
Input costs rose significantly in 2023 which placed increased pressure on farm business margins, with fertilizer costs being a notable example. Although some input costs are decreasing, they remain higher than pre-inflation levels. This is likely to continue posing risks due to the connection to energy markets and global instability, which could also be evident in 2024 if consumer confidence does not recover. Whilst there hase been a few notable cases of insolvencies in the sector, we haven`t seen a large increase overall.
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According to agricultural statistics, approximately 60% of the UK's domestic consumption is produced locally, with 70% of the agricultural area being utilised1. 36% of this is used for crops, with cereals being the predominant harvest, accounting for 71%. However, unpredictable weather conditions and climate change are likely to negatively impact this year's production due to soil deterioration.
Fertilisers and energy are crucial inputs for food production, and the UK relies on the global supply chain for these resources. The prices of these inputs are interconnected, with some fertilisers dependent on gas for production. The resulting increased prices have driven up costs for food producers in recent years, placing pressure on the viability of businesses. To mitigate the impact of chemical fertiliser prices there is increased change in farming practices, such as the use of cover crops and rotational cropping. Whilst non-domestic electricity prices in the UK remain high compared to the rest of the world, gas prices are relatively low compared to the EU.
As the internal production of goods is insufficient to provide a wide variety of products, the UK rely on imported goods. However, the process of importing goods has become more complex due to new regulations, including the implementation of cross-border checks for various products imported from the EU. This is leading to significant delays and additional input costs for businesses. Despite this, food inflation has eased to 1.7% in May, aligning with the overall inflation rate, which fell to 2% (CPI) in the 12 months to May 20242. This decrease in food prices has influenced consumer shopping behaviours, with value becoming a key consideration leading to changes in retailer loyalties.
The increase in food prices in the UK has prompted shifts in consumer preferences and behaviours. Individuals are now more conscious of the products they consume, purchasing quantities and waste reduction. Additionally, consumers are actively seeking discounts, promotions, and loyalty programs offered by supermarkets which is leading to heightened price competition amongst retailers. Online distribution has also experienced growth, particularly post-COVID, with a positive trend continuing especially among younger generations. It’s anticipated that more businesses will transition some of their activities to the online environment in response to this trend.
Source: GOV.uk, Allianz Trade
In the coming period, we expect a favourable outlook in this industry, which could lead to decreased expenses for businesses if the trends observed earlier in the year persist. We anticipate a steady food price inflation, which is likely to ease some of the challenges faced by businesses in the sector and create opportunities for further expansion. The projected food inflation for 2024/2025 stands at approximately 2.2% seems encouraging; nevertheless, global uncertainties are inherent.
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