By now, everyone will have felt the impact of rising prices for food and household goods, but things are likely to get worse before they get better.
We’ve all seen the footage of container ships banked up along the coast of California and we’re all aware of the damage that a shortfall of HGV drivers has had on UK supply chains. But there is one impact that probably isn’t as immediately obvious to the public at large.
The ICE UK Natural Gas Continuous Contract is up by 282 per cent in the year to date. That not only means that you will be paying more to heat your home this winter, but you will also continue to feel the pinch at the supermarket check-out. That’s because natural gas is a key feedstock in the Haber–Bosch chemical process used to make nitrogen-based fertilisers. By some estimates, this form of synthetic fertiliser is used in half of the world’s cereal crops and accounts for up to 5 per cent of global natural gas demand. Unfortunately, there is a lagged correlation between nitrogen and natural gas prices, one that has already had negative impacts.
In September, it was announced that high gas prices had forced CF Industries (US:CF) to suspend production at its two UK ammonium nitrate manufacturing plants as they could no longer be operated profitably. However, that decision was eventually reversed following central government intervention, not only to underpin domestic fertiliser supply, but also to ensure that production of the crucial carbon dioxide byproduct was maintained. Any prolonged disruption to CO2 supplies would have had dire implications for the entire UK food chain.
If there has been any positive aspect to the disruption brought about by the pandemic, it may be that it has forced a rethink of supply chain management, in which a focus on cost efficiencies has given way to considerations over resilience and agility.
For now, however, we can certainly expect high fertiliser prices will endure well into 2022 even if Vladimir Putin makes good on his promise to loosen the taps. And the prospect of a bleak (and expensive) northern winter may yet harden the public’s attitude on the pace of the government’s energy transition through to 2030.
We can guess what all this means for households, at least in terms of discretionary incomes. With a period of belt-tightening on the horizon, the question is the degree to which the producers of food and household goods will bear the input price increases, or whether they will largely be passed on to retailers and consumers?
In its latest third-quarter update, Unilever (UNLV) said that it had already raised prices by 4.1 per cent to counter cost inflation, but further increases may be needed as the consumer goods giant expects that inflation will persist well into next year. Several other consumer goods heavyweights, including Colgate-Palmolive (US:CL) and Procter & Gamble (US:PG) have also been passing on costs, while Kraft Heinz (US:KHC) recently revealed that it has hiked prices for around two-thirds of its product portfolio.
Although producers appear quite willing to offset cost increases, they may live to regret it. For it is likely that supermarkets and wholesalers may have to take greater account of price sensitivity on the part of consumers.
Part of the investment appeal of companies such as Unilever is their brand strength. Consumers have always been willing to pay a premium for tried and tested products like PG Tips and Hellmann’s, even during the height of the pandemic. However, given inflationary prospects, it is certainly conceivable that more shoppers could opt for cheaper in-store, own-label brands.
Admittedly, stores which provide own-label alternatives struggled to meet elevated demand in the early part of the pandemic due to inventory shortfalls, even as panic buying and stockpiling were the order of the day. And producers of fast-moving consumer goods (FMCG) were the beneficiaries of some unexpected market developments as Covid-19 took hold, most noticeably a striking increase in demand for sanitisation products.
But the pandemic-linked dynamics are on the wane, so price elasticity is likely to become an ever more important consideration up and down the line. One of the take-aways from YouGov’s latest International FMCG report is that consumers are now taking a more measured approach to their weekly shop. Of course, that could conceivably mean greater considerations over environmental and category consumption, but Occam's razor suggests it’s probably about price. Brand loyalty could be in for its severest test yet.
