John Whelan: Food and drink inflation bolstered but year ahead looks bleak
Teagasc's December report which found net margins in the dairy industry here surged in the past year.
Never waste a good crisis seems to have been very much in the minds of Ireland’s food and drink exporters in 2022.
The rampant increase in exports last year as reported by Bord Bia was mainly driven by the sector pushing up prices. This is unlikely to continue in the year ahead, as buyers at home and internationally look for lower prices to meet consumer cost of living pressure.
There is also the concern that producers here may have damaged the long-term brand image of Irish goods, as increases may be seen as price gouging during the hard times of the last year and may linger long in the mind of buyers.
The average rise in unit export prices of food and drink supplied from Ireland last year was an unsettling 18.5%, as reported by Bord Bia in its report on export performance and prospects released earlier in the month.
Stacking this up against general inflation across the EU of more than 10% and 9% in the UK, there is real cause for worry that Irish exporters may be pricing themselves out of their largest markets.
Let’s talk further about inflation. EU inflation last year was the highest in over 25 years and created a nightmare situation for central banks which are mandated to hold it at about 2%.
Two things largely influenced this very high inflation level. One was the restriction in world food and feed production in the last year, and a big part of that was due to the war in Ukraine. The other is the disruption in global supply chains created by the Covid pandemic. Crude oil, grain, and fertiliser were all extensively disrupted by the war and are such big factors in the entire Consumer Price Index.
Rampant crude oil prices over the past year have been particularly damaging to industry and added to the cost-of-living crisis. There’s really no component in the consumer index that’s not affected by oil prices. Those two things together, the disrupted food production, as well as the overall lack of domestic and global oil production, have really been keeping those consumer prices propped up.
Many countries introduced food export restrictions to try and control rising inflation in their home markets. The wave of export restrictions already affects nearly one-fifth of calories traded globally, that’s nearly double the impact of the last global food crisis of 2008, according to the International Food Policy Research Institute (IFPRI), a US-based think tank.
When it comes to the farm managers, fertiliser cost increase has been exceptional since the start of the Covid-19 restrictions in China and Russian’s invasion of Ukraine. Irish wholesalers import the raw fertiliser mainly from China, with some supplies from the USA and India, and formerly Russia. Then the importers blend and package for the farming industry here. But fertiliser costs are a small part of the farming cost mix. A telling indicator of the low impact of high fertiliser costs can be found in Teagasc's December report which found net margins in the dairy industry here surged in the past year.
Turning to the year ahead, approximately one-third of all Irish food and drink exports go to the EU, a further third to the UK, and the remainder to the rest of the world.
The International Monetary Fund (IMF) are forecasting the EU and the UK will slide into recession next year, affecting consumer demand. With the UK remaining the largest single market for Irish dairy exports, the long-term implementation of a free-trade agreement between the EU and the UK should be the number one priority for the Irish government. However, with the decline in the UK economic outlook and a forecast reduction of 15% in the global milk price, Irish producers and exporters are facing a bleak 2023.
There is also no sign that the Russian war against Ukraine will end anytime soon, continuing to disrupt the key food and drink sector.
However, all is not doom and gloom. Some economists believe a slowdown in inflation last month in the US and Europe may be paving the way for a “Goldilocks” scenario for consumers, allowing the central banks to bring down consumer prices without increasing interest rates again — and not damaging business growth.
And the rapid reopening of China’s economy from Covid-19 lockdowns is brightening the outlook for Irish exporters, who lost sales to the market last year.
