Q3 Commodity Report - Autumn 2020

COMMODITY REPORT AUTUMN 2020

COMMODITY REPORT AUTUMN 2020 Economic Outlook The general outlook continues to remain volatile in many commodity markets. This is linked to two key areas, which are:

1) The fluctuations in supply and demand throughout the ongoing global pandemic.

2) Brexit, and whether the UK government can agree a free trade deal with their single biggest trading partner (the EU), with time edging ever-closer.

The Eat Out to Help Out campaign has been a big success for most operators and this has seen volumes rise quickly throughout August, sometimes at a faster rate than manufacturers could manage. Covid-19 social distancing measures within production environments, alongside slower global supply chains, have also resulted in some disruption.

COMMODITY REPORT AUTUMN 2020 Brexit

Suppliers warn of ‘frightening’ price hikes in no-deal

Brexit is high on everyone's agenda again, even with a Free

September 12, 2020

Trade Deal. Legislation and Import Administration, which will

Shoppers will face ‘frightening’ price hikes in the event of a no-deal Brexit under the UK’s proposed tariff policy, food suppliers have warned.

be imposed from 2021 onwards, are likely to make trade more difficult and inevitably add some cost. Without a Free

Trade Deal, there will be additional tariffs on many key products. There is a page further on which gives an overview of what these may look like.

It follows Boris Johnson’s claim this week that a no-dead exit would be a “good outcome” for the UK as it will provide “full control over our laws, our rules, and our fishing waters.”

Food tariffs will rise by an average of 20% if there is no EU trade deal, according to the BRC, though products such as olive oil could see increases of at least £1/litre. “You cannot possibly hit people with that level of food inflation” said Walter Zanre, MD at Filippo Berio UK. The small margins in the food industry mean the full costs will be passed onto consumers according to Zanre, with the olive oil producer facing tariff costs of more than £13million each year on its UK sales.

Environment secretary George Eustice confirmed on Radio 4’ Today programme this week that tariffs will apply in both imports and exports with the EU in the event of no-deal.

Source: The Grocer

COMMODITY REPORT AUTUMN 2020 Brexit Tariffs Update – August 2020 Potential Brexit Tariffs – Customer Impact UK Tariffs in the event of no deal with the EU Product

Tariff

Approx. Customer Increase

Butter

£158/100kg

35%-40%

Cheese

£139/100kg

35%-40%

Bacon

£57/100kg

15%-20%

Fresh Chicken

£85/100kg

20%-25%

Frozen Vegetables

14%

14%

Frozen Potato Products

14%

14%

Canned Tomatoes

14%

14%

Canned Fruit

20%**

20%**

* Information can be found at: https://www.check-future-uk-trade-tariffs.service.gov.uk/tariff **Vary dependent on product

COMMODITY REPORT AUTUMN 2020 Exchange Rates The Pound versus the Euro has been very consistent in recent months, holding somewhere around €1.10 - €1.15. In the past week however, it has fallen to around €1.08. This is seemingly down to nervousness in currency markets over a decision by Boris Johnson to introduce the Internal Market Bill, which would change the terms of the previously agreed and signed Withdrawal Agreement. Markets are seeing this as a significant barrier to any free trade deal.

The Pound versus the Dollar had improved since April but again has gone backwards for the same reason already mentioned. Considering that it was as low as $1.15 back in March, this is still some improvement. The Pound did fall as UK lockdown was implemented

but has since strengthened. This is more to do with the Dollar weakening as cases spiral in the US, interest rates are zero and US treasury bond yields are less than 1% (the first time in over 10 years).

COMMODITY REPORT AUTUMN 2020 Fuel Costs The fuel market in the current Covid-19 climate is extremely complex and, up until this point, fuel prices have experienced significant volatility. Since lockdown eased in June/July, fuel prices have shown some signs of recovery, with prices staying quite steady.

The Brent crude oil is rebounding slightly at $39.12 per barrel at the

start of October 2020 (13% increase from end of May). The average UK petrol and diesel price per litre (ppl) at the end of September 2020 was 114.60ppl and 118.11ppl respectively. There is no sudden change forecast for petrol, however diesel has been indicated as very likely to decrease soon.

COMMODITY REPORT AUTUMN 2020 Import costs likely to hike fresh food prices August 8, 2020 The spectre of food price increases is hanging over the fresh produce category, despite the easing of lockdowns in both the UK and mainland Europe, a major importer has warned.

Low flight capacity among the major carriers has forced fruit & veg importers to rely on more expensive modes of getting produce into the UK. The issue had been further compounded by the lack of clarity from government over post-Brexit trade arrangements, said fresh-cut fruit supplier Blue Skies.

The business, which relies on air services to fly its produce from sites across the globe, warned the sector expected increased costs to continue as scheduled flights had not come back online as quickly as it had hoped.

"It is a little more expensive to operate," said Blue Skies CEO Hugh Pile. "We have been using freighters and ghost flights, which are more expensive than using an airline carrying passengers."

Although costs had started falling from a peak of 50% higher than normal in May, it was still about 25% more expensive to ship produce, Pile added, due to the need to often bring produce by road to the UK from the European airports that had welcomed the ghost flights.

He stressed Blue Skies remained in a "strong" position, despite these logistical challenges. However, he warned the added complexity of shipping produce to the UK could ultimately lead to more difficulties once the UK's Brexit transition ended in December.

"One point of clarity that's needed is on the freedom of movement of produce. We need confidence in a seamless customs process for fresh produce. We all know the strict nature of grocer depot times."

More detail was also required on labour and tariffs, he added, with Blue Skies negotiating tenders with retailers.

Source: The Grocer

BEVERAGES

DRY STORE

FRUIT & VEG

DAIRY

MEAT & FISH & POULTRY SEAFOOD

KEY COMMODITY PRICING Tuna

Chicken

Pork

Butter

Milk

Potatoes

Fruit & Veg

Wheat

Rice

Coffee

Cocoa

Cheese

Sugar

Edible Oils

Tomatoes (Canned)

Shell Eggs

FISH & SEAFOOD Tuna COVID-19 issues for tuna catchers see skipjack prices rise fast

Salmon Farmed Salmon prices had started to pick up in May and June but have since come down further again and are currently at the lowest levels this year.

September 12, 2020 Wild salmon prices, such as that used in canned salmon, are expected to The issues tuna fishing companies are having with coronavirus prevention measures is driving up the prices for skipjack in hubs in Thailand and Ecuador, as well as yellowfin for delivery to Spain, sources told Undercurrent News.

On top of the COVID-19 issues for catches, two of the most significant tuna supply fisheries have partial seasonal closures in place.

The closure on catching on fish aggregation devices (FADs) in the Western and Central Pacific Ocean (WCPO) runs from July 1 for the bulk of the fleet but also remains in place for some countries in the region in October. Then, on July 29, a big chunk of the eastern Pacific Ocean (EPO) fleet will tie-up as part of one of two annual closed fishing periods in that are...

As a result, prices for whole-round skipjack delivered to the hub of Bangkok, Thailand, have risen to $1,400-$1,450 per-metric-ton for delivery in early August, compared to $1,200/t for July deliveries, sources said.

Source: Undercurrent News

remain firm, with the harvest looking down year-on-year. The latest estimates

are that red salmon harvest numbers are down about 17% and pink down 57%. This was expected for pink salmon, as the harvest numbers increase one year and fall dramatically the next. It does however mean prices are expected to rise.

MEAT & POULTRY Pork Pork prices are proving quite difficult to read at the moment. Across Europe there is a backlog of pigs, which are at larger weights than

EU pig prices remain stable August 27, 2020

usual. This has led to increased slaughter numbers. The backlog has been caused by the recent fall in demand. That said, bacon prices are stable, particularly as business has picked up in August with the Eat Out to Help Out scheme proving very successful.

The outlook is that prices will only move in one direction given that the Chinese authorities have agreed for EU countries to export there again. It is seen that this could start to see pigs taken out of European circulation, however the key question that underpins all of this is whether demand will fall towards the end of the year.

Since our last update, EU pig prices have remained relatively steady. Combined challenges in processing capacity, as well as heavier average carcase weights, has weighed on markets.

Source: AHDB

MEAT & POULTRY Chicken Poultry prices have recovered well from the pandemic and currently are only about 3% behind this time last year. The general feeling is that as a lower cost protein (compared to beef and fish for example), chicken has fared reasonably well price wise.

DAIRY Milk Prices The dairy market is generally quite firm, with most processors at least keeping milk prices the same and with a good number increasing their price paid to suppliers/farmers for September onwards. Arla and Muller are staying the same, with Freshways,

Pensworth, Glanbia (cheese) and Saputo/Dairycrest all increasing their prices. Many will recall in the previous report, farmers pouring milk away and requiring government support to keep going, so the prospect of higher prices will be welcome news for farmers.

Milk prices creed up as dairy commodity values rise August 27, 2020 Three milk processors have announced farmgate price rises as the dairy industry recovers from the coronavirus crisis.

Rising commodity values Peter Meehan, senior commodity analyst at financial services network StoneX (formerly INTL FCStone), said that the value of dairy commodities is rising slowly. “After six consecutive weeks of price stability, the European butter quotation finally made a move, albeit small, to the upside this week (+0.2%).

Skimmed milk powder and cream prices have also risen in recent weeks and demand for milk has not been outstripped by rising production, he said.

Source: Farmers Weekly

DAIRY Butter Butter prices have seen an increase over the last few weeks, however the general feeling in the market is that buyers are hesitant to cover longer volumes due to uncertainty around demand in Q4. Pricing currently sits around ÂŁ3,000 per tonne for bulk butter.

At the moment there is nothing significant to suggest that prices will change drastically from a supply and demand point of view. The biggest factor weighing on dairy markets are potential UK Government Tariffs, which may see imported butter with a tariff of approximately 40p per 250g pack (there is a summary of key tariffs at the back of this presentation).

DAIRY Cheese (Cheddar and Mozzarella) Cheddar prices have increased a little over the last few months, but in general remain very steady. Again, the key factor is whether

cheddar ‘imported’ from Ireland or the rest of Europe will carry a tariff of £1.39/kg.

French Brie, Spanish Goats Cheese, Italian Grana Padano and Cypriot Halloumi, the list could go on. Many of these items are also at risk of significant tariffs should the UK Government fail to reach an agreement with the EU. Mozzarella is in tighter supply, not least

because a lot of the mozzarella that arrives into the UK is from European sources.

Continental cheese is closely linked to Brexit and currency exchange. If we achieve a trade deal and the pound strengthens, we should see decreases, and vice versa.

The UK can only produce 60% of the cheddar to meet the UK’s demands. The balance is imported – based on this, there are strong assumptions that a deal must be achieved on Cheese.

DAIRY Shelled Eggs

Sales of eggs increase 37% as consumers opt for British produce

Shell eggs were one of the product areas

Sales of eggs have surged by more than a third as their soaring popularity among Brits continues to grow during the coronavirus pandemic.

in

huge demand throughout lockdown,

especially with the surge in home baking.

Retailers couldn’t get everything they wanted from the UK and had to look to European shell producers to keep shelves full. Demand for home baking has fallen away slightly as lockdown measures have eased. With retailers still keen to switch out of colony caged into free range, this is likely to keep the demand pressures on. There may be some increases in supply as more birds are being farmed, this was initially to deal with the influx of avian flu across

Europe and the UK last year.

August 27, 2020

Year-on-year retail value sales for shell eggs in the mults rose by 37% to £294m during the 12 weeks to 12 July [Kantar]. Volumes rose by 28% during the same period.

The figures follow a period of “exceptionally high demand” for shell eggs, as Sainsbury’s put it in May, after it was forced to source eggs from Spain and Italy to keep shelves full.

But amid reports of Sainsbury’s moving to slash prices on its unwanted imported eggs over the past month (with boxes selling for as little as 37p in some stores), shoppers, retailers and food manufacturers were largely looking for “the reassurance of higher production standards” of UKgrown eggs, suggested the British Egg Industry Council.

This was reflected in a 28% or 2.5 billion egg increase in UK production over the past decade to a total of 11.39 billion eggs last year, according to BEIC data.

“Consumers want the eggs used in products to be British and, at long last, retailers and manufacturers have recognised this,” said BEIC chairman Andrew Joret. He added the number of eggs (in shell or product format) imported was now at its lowest level since 2011.

Source: The Grocer

DRY STORE Wheat It is safe to say that flour prices will be higher for the new season based on the poor wheat crop. Throughout lockdown, flour was one of the key in demand lines, with retailers selling 16kg bags just to keep up with the demand for family baking. Current wheat prices are well over £170 per tonne compared to £135 per tonne

at the same point last year.

Britain faces rise in bread prices from dire wheat crop September 2, 2020 This year’s dire wheat crop in the UK has left farmers and millers with concerns that bread prices may rise.

Farmers have faced heavy rain during winter and one of the driest springs on record, according to Tom Bradshaw, vice president of the National Farmers Union (NFU). Establishing crops was difficult and winter drilled crops lacked any spring growth.

“The combined weather pattern has resulted in the UK’s lowest wheat crop area in 40 years this summer and we expect yields to strike a similar multi-decade low. This demonstrates the volatility that can be experienced across a farming year and why food production and food security must be taken seriously,” he added.

Source: British Baker

DRY STORE Rice Rice prices have headed in different directions in terms of pricing, dependent on the variety. Standard long grain has increased, as can be seen from the graph below. Rice was a key ‘store cupboard’ item throughout lockdown and the pricing jumped dramatically during that time. It has fallen back slightly since but is still certainly higher than the same point last year.

On the contrary basmati prices have fallen slightly versus last year. This is possibly due to it being more premium and associated more

with the 'out of home' market, where there demand simply wasn’t there.

DRY STORE Tomatoes (Canned) Canned tomato prices have risen for the new season. The market has very much gone in two directions. Retail sized tins (i.e. 400g) sold very quickly, with larger catering sized tins moving much slower. This had led to many factories only producing what has been contracted for 2020-2021, meaning there is less ‘free stock’ in the market. The factory preference is to produce retail tins, where the demand is seen as ‘secure.’

There have been additional costs this year for producers too, such as paying farmers a higher price for the raw materials, along with the additional costs of storing and financing the remaining stock.

The packing season is only really getting started now and reports are circulating that the crop is in a disastrous state due to poor weather conditions. If this is the case, it could still impact the availability of product.

DRY STORE Sugar

Edible Oils

Sugar prices have increased year on year. There is expected to be

Edible oil prices have started to increase in price again as

a 15% reduction in beet sugar yields this year. This is due to the

demand has improved. Prior to lockdown, rapeseed oil in

driest May on record and infestation of yellow disease, which

particular was expected to remain firm. However the lack of

renders the product unusable.

demand in the out of home markets meant pricing fell to

artificially low levels. The underlying market conditions suggest The sugar market is potentially about to undergo a significant

that pricing will stay higher providing people continue to eat out

change in the event of no free trade deal with the EU. A no deal

of home.

situation would mean that European beet sugar imported into the UK would be subject to a ÂŁ350 per tonne tariff. In effect, this could make the market a duopoly with only two main producers.

BEVERAGES Coffee Coffee volumes have taken a real hit throughout lockdown. Even in August, takeaway coffee volumes are down 51% year on year, as city centres see much less footfall than pre-Covid 19.

As many key commodities did, prices fell month on month throughout May and June. Since then, prices have increased in the World markets for July, August and September. In real price terms, Arabica is very similar to

last year, however Robusta (the cheaper of the two bean varieties) has fallen about 10% year on year.

From cool beans to has-beens? The Covid threat to Britain’s coffee shops September 4, 2020 Why the chains and independents at the heart of Britain’s high streets are in deep trouble.

It’s the multibillion-pound industry that kept on growing, based on a bean that Britons couldn’t seem to get enough of: coffee.

Until, that is, the pandemic struck. As is the case with many businesses hit hard by coronavirus, the ubiquitous coffee chains that have powered city centres and high streets across the UK are in deep trouble.

This week, Costa announced it is cutting more than 1,500 jobs. Pret a Manger is losing almost 3,000 staff and closing 30 outlets – while independents from The Exploding Bakery in Exeter to Kaffeine in central London have reported a slump in customer numbers Source: The Guardian

BEVERAGES Cocoa Cocoa prices remain stable at the moment. There was an expectation of a price increase, but reduced demand for more ‘luxury’ type products has meant prices have flatlined.

In 2019, the world’s 2 largest producers, Ivory Coast and Ghana, convinced major buyers to implement a ‘living wage differential.’

The graph to the right shows that farmers and growers account for less than 5% of the value of the market.

In what is being called an ‘OPEC for cocoa’, by stopping supply of cocoa

for a period of 1 month, this drove prices up around $400 per tonne and major processors unilaterally agreed to pay the additional pricing mechanism. This will start from the 1 October 2020, which is likely to see prices rise early next year, as this gets passed on to the consumer.

FRUIT & VEGETABLES Uncertainty threatens UK fruit & veg supply August 1, 2020 The UK faces fruit & veg shortages and price hikes due to a lack of clarity on post-Brexit trading and labour provision, industry bodies have warned.

The government’s proposed plans for future trading with the EU would “damage” the UK fresh produce industry, said Fresh Produce Consortium CEO Nigel Jenney.

“We are not confident government departments will adopt the most effective solutions to support the UK fresh produce industry,” Jenney said.

Despite intense lobbying by the FPC, the government had not yet provided “essential information which was missing from the Border Operating Model and the Northern Ireland Protocol”, he claimed.

Importers needed to know now which products were deemed to be ‘controlled’ or ‘high risk’ and therefore needed pre-notification and checks, he added, in addition to more detail on where consignments would be cleared and whether facilities would be resourced properly “to avoid delays and increased costs”.

“Businesses which have only ever traded with the EU will be coming new to many requirements and will need government support. Not all may use an intermediary to do their customs declarations.”

Jenney also added his voice to mounting concerns over a projected labour shortfall for the 2021 growing season in the UK, with time now running out to recruit sufficient numbers. A lack of progress on both labour and trade would ultimately have the potential to “create shortages and increase prices for consumers”, he warned.

Source: The Guardian

FRUIT & VEGETABLES Potatoes Potato prices have fallen year on year, due to oversupply in the market. Up until recently, demand has been almost nonexistent. Eat Out to Help Out has increased demand, but as yet it's unknown to what extent this will remain.

Many chip factories had a lot of stock remaining in warehouses and had to throw product away as the quality deteriorates over time.

In keeping with the Brexit theme, frozen chips from Europe which is where most low-cost producers are based, have a proposed tariff of 14% in place from 1 January 2021.