Volatility and inflation the new normal, experts flag years of uncertainty ahead

20 Oct 2022 --- As food inflation hits record highs across continents, consumers and companies should prepare for years of price fluctuations and unforeseen market disruptions. However, according to experts, knowing that the path ahead is not going to be easy can be seen as an advantage.

“The world is moving into a new era with increased volatility. Protectionism, sustainability, exchange rate fluctuations, transport challenges and labor imbalances put pressure on the old model of centralized production, and companies should consider ‘just in case’ rather than ‘just in time,’ Francois Sonneville, director of beverages at RaboResearch, tells FoodIngredientsFirst.

Although Rabobank analysts expect gas prices to come down slowly, they will remain way above historical levels for a couple of years, rather than months, they warn. 

Price volatility could also worsen if unforeseen events such as a cold winter or problems with Norway’s gas line could “send prices sky high again.” 

However, “the longer a crisis lasts, the more solutions will emerge,” flags Sonneville. As companies and customers adapt to the times we live in.

“Additional plantings of grains by farmers, liquefied natural gas shipments etc, all flow from areas with low prices to countries with high prices and marginal investments will be made. There have been structural and transitory reasons for prices to go up and we expect some normalization, but no return to pre-conflict prices,” he explains.

Double and triple energy bills
Sixty-three percent of Belgium food and beverage companies have reported paying double for gas and electricity, with 40% seeing their bills triple, according to a September survey of the Belgian food and drink association FEVIA. 

Two-thirds of F&B companies brand the situation as “critical.” 

Four out of ten F&B businesses say they could reduce or temporarily stop production due to red-hot energy costs, highlights FEVIA.

“The data showing the Belgian food and drink sector under pressure is sobering, and reflects what we are hearing from across the rest of Europe,” Will Surman, spokesperson for FoodDrinkEurope, tells FoodIngredientsFirst.

EU food businesses call for help
Surman highlights that all 289,000 food manufacturing businesses in the EU are under pressure. 

“Given nearly every meal in Europe relies in some way on products from food manufacturers of all sizes, we are asking EU and Member State policymakers to formally recognize all food chain actors as essential, and to ensure their access to affordable and stable supplies of energy as a critical step to keeping shelves and fridges well stocked,” he continues.

Surman stresses that food businesses are doing “their best” to reduce gas reliance. 

He cites Irish oat company Flahavan, where 70% of energy is self-generated on-site with green sources – wind, water, solar and biomass.

However, some companies have been forced to opt for other energy sources, such as oil, to avoid shutting down production. 

A Nestlé Germany spokesperson told FoodIngredientsFirst that the company was considering the possible conversion from gas to oil burners. German beer producer Krombacher also admitted to stockpiling oil reserves to be able to switch its energy mix with short notice if needed.

Higher costs, higher prices
With companies facing higher costs, most businesses have opted to raise consumer prices.

Nestlé raised prices by 6.5% in the first six months of 2022. Even at higher prices, the company reports a rise in organic product sales of 8.5% in the last nine months.

Danish-Swedish multinational cooperative Arla – the UK’s largest dairy producer – has increased its milk prices seven months in a row. With the cooperative increasing prices this October by 0.01€ per kg (US$0.01).

Brands, innovators, producers and consumers are wrestling with rising costs and greater instability. Innova Market Insight flags in its Top Ten Trends for 2023 that combating these issues requires a deep understanding of how far consumers are willing to compromise on cost. Redefining Value being crowned the leading trend.

£4 for a flat white?
UK coffee lovers will have to think twice before getting a second cup of coffee – or even a first one – as the price of a flat white is predicted to top £4 (US$4.48) by the end of the year in most UK largest food chains, according to Cairngorm Coffee Roasters and Dunns Food and Drinks.

Rampant food inflation of 14.5%, not seen since 1980, will put extra pressure on wallets, forcing consumers to rethink their daily purchasing habits. 

“One worry we have is that rising costs could push the price of coffee into a bracket where customers decide it’s more of a luxury lifestyle decision, rather than everyday morning essentials,” says Robi Lambie, co-founder of Cairngorm Coffee in Edinburgh.

“With everything considered, we predict the price of a flat white coffee will be at least £4 (US$4.48). It sounds ludicrous, but it’s the position we’re likely to find ourselves in,” he underscores.

Lambie explains that the average price of a pint of milk in August was 62p (US$0.69) – the highest ever. 

Dairy prices also bite in Germany, where consumers are paying 49% more for butter, 30.6% more for whole milk and 21% more for yogurt this 2022. Coffee is also up 19.3%, according to the German Federal Statistical Office.

However, in the short term, some price relief for coffee might materialize due to the decrease in arabica prices, with coffee futures for the variant setting a one-year low. Nonetheless, inventories remain low, and if producers in Brazil hoard the commodity, it could end the short bearish run.

By Marc Cervera