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Which sector saw highest costs since the Brexit vote?

By Matt Atherton contact

- Last updated on GMT

Production costs continue to rise for manufacturers
Production costs continue to rise for manufacturers

Related tags: Cost, Inflation

The cost of manufacturing food and drink products has risen 4.3% over the past 12 months across all sectors, according to latest data from the Office for National Statistics (ONS).

The ONS’s monthly input index showed a 4.1% rise between June and July 2016, compared with a 1% rise between May and June 2016. The report was the first to analyse producer costs since the UK’s decision to leave the EU.

Costs were rising in all analysed sectors of the food manufacturing industry – including meat, fish, fruit & vegetables, baking and beverages – between 2001 and 2013, when inflation reached unprecedented heights.

Costs decreased in the following two years, but rose again earlier this year. July’s Brexit vote caused nationwide-inflation to rise quicker, reaching a 20-month high, the ONS reported.

See the charts below for more information. Scroll over the timeline for detailed comparisons of the Producer Price Index between calendar years.

Head of prices at the ONS Mike Prestwood said that although Brexit appeared to have little impact on consumer prices, “the Producer Price Index suggests the fall in the exchange rate is beginning to push up import prices faced by manufacturers”​.

Rising prices of ingredients

Food manufacturers could face rising prices of ingredients and other raw materials, according to the Food and Drink Federation (FDF), while the falling strength of the pound wouldn’t help.

An FDF spokesman told FoodManufacture.co.uk: Food manufacturers contract in purchases of key raw materials to minimise price volatility and this means impacts on consumer prices lag behind shifts in commodity prices.

“If commodity price increases are sustained, manufacturers will face higher costs when they renegotiate contracts.”

Vegetable and animal oil input costs have risen particularly quickly since April. Funding for UK farmers under the Common Agricultural Policy is expected to cease after Brexit, which could pile more pressure on farmers input costs. Chancellor Philip Hammond has said that British taxpayers would plug the funding gap.

National Farmers’ Union chief arable advisor Guy Gagen told FoodManufacture.co.uk: ​Arable farmers faced with high input costs are already switching out of high-end purchased seeds, and using less expensive varieties or saving seed from their previous crops for replanting.

“Some are also changing the mix of crop species in their rotations, for example less of the higher input crops including oilseeds and more lower-input. These require less fertiliser and crop protection products, but also yields much less. This is reducing national production of the crops grown, and as supply reduces price has increased marginally,” Gagen explained.

The FDF said that food manufacturers had adopted coping strategies in the past to keep a lid on price hikes, mainly by offsetting costs by improving efficiency and productivity.

“However, sustained volatility makes it incredibly difficult for companies to keep absorbing higher production costs without having to pass on those increases,”​ said the FDF.

Continue to rise

Inflation since the referendum could continue to rise in the near-future, said British Chambers of Commerce head of economics Suren Thiru.

“While still weak by historic standards, we expect this rise to be the start of a prolonged period of increasing prices, as the post-EU referendum slide in sterling feeds through to high input costs,”​ said Thiru.

“Higher inflation squeezes consumer spending and increases cost pressures on businesses. However, if economic growth slows as many expect, then price rises are likely to be limited.”

Meanwhile, chief executive of the British Frozen Food Federation Brian Young predicted the reoccurrence of inflation in an exclusive video interview​ with FoodManufacture.co.uk. Young said the weakened pound would likely increase input costs by around 30%.

Food and drink manufacturing inflation – at a glance

  • 4.3% rise over the past 12 months
  • 4.1% rise last month
  • Inflation reaching unprecedented 2013 high.

Related topics: Bakery, Dairy, Meat, poultry & seafood, Drinks

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