Oh, food, glorious food: Get used to higher prices

October 17, 2021

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3 min read

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What's going on here?

Kraft Heinz warns consumers that rising food prices around the world are here to stay, whilst other companies such as Nestlé and PepsiCo also raise their prices.

What does this mean?

As economies start to gain some momentum following the COVID-19 pandemic, the long term effects of the pandemic and lockdowns are far from over when it comes to food production. The boss of Kraft Heinz, Miguel Patricio, said that the international food retailer was going to increase its prices in several countries.  Despite this, the US is currently victim to increased logistical costs and labour shortages. The UK is also experiencing a mixture of labour shortages, more expensive commodities and a shortage of truck drivers.  As a result, supermarket giant Morrisons has warned of industry-wide price rises in the UK.

What's the big picture effect?

During the pandemic, many countries experienced a fall in the production of crops and raw materials due to lockdown measures and illness. For example, Brazil, a huge agricultural exporter, experienced poor harvests. In the long run, technology can help farmers produce food efficiently, but for now, the production of raw materials is slower than pre-pandemic production and producers cannot keep up with the recent surge in demand. This makes food production more expensive for companies and adds to supply chain costs. The UN Food and Agriculture Organisation has noted that the increased cost of ingredients (i.e. cereal and oil) has caused global food prices to soar to a 10 year high.

Global supply chains have also been heavily affected by the pandemic, causing transport disruption and issues with shipping, making it even harder for suppliers to keep up with higher demand. Similarly, Chancellor Rishi Sunak has warned that distribution problems for basic food products could continue for months. Essentially, increased supply chain costs in transport and production leave suppliers and retailers no choice but to pass on the increased costs to consumers.

Furthermore, the shortage in CO2 (which is used for fizzy drinks, beer and to keep food products fresh) in the UK also poses the risk that food prices will remain high well into the new year.  Although the Government has set up a deal to bail out a CO2 supplier (CF Fertilisers) and imposed a fixed rate for CO2  prices, food producers will still face higher prices than they are used to.

Nonetheless, Mr Patricio noted that not all costs should be passed on to the consumer and that firms are going to have to absorb some of the higher costs. Even though he stated that it is up to the food industry and all companies to try to minimise price increases, this currently does not seem feasible. PepsiCo announced earlier this week that it was also facing higher costs on transport and raw materials, meaning it would have to raise prices in early 2022.

On top of the energy crisis and cuts to Universal Credit, rising food prices are going to hit the most vulnerable people the hardest. Despite the CO2 crisis deal and Prime Minister Boris Johnson insisting that supply chains are resilient, increased supply chain costs for firms could cause food shortages and price hikes well beyond the festive season.

Report written by Natasha Dayananda

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