Climate, Fossil Fuels and UK Food Prices.

Abstract

The global food sector has been hit by a ‘perfect storm’. Following in the wake of the Covid pandemic, agricultural and food supplies have been hit by extreme temperatures, drought and flooding and faced the consequences of the Russian invasion of Ukraine. The latter has increased energy prices globally; not just oil but also the prices of natural gas and fertiliser. These rising energy costs not only affect the costs at the farm-gate but also throughout the rest of the food supply chain. The combination has resulted in prices (both nominal and real) of food and agricultural commodities on world markets reaching levels not experienced since the major oil and commodity crisis of 1972-74. The UK imports around 40% of its food and agricultural needs from world markets and is therefore particularly prone to these global events. Although much media attention has been paid recently to rising fuel bills for households, food inflation is also a major concern. As of July 2022, food inflation was recorded at 12.7% and is second only to fuel bills in the rising cost of living faced currently by UK households. There are many factors that can determine food prices for consumers including exchange rates, labour costs and sector specific supply shocks. In this report, we focus on the role played potentially by climate change, as reflected in global temperatures and the increasing cost of fossil fuels. The interaction between these effects is complex: climate change affects both the price of non-oil (agricultural) and oil prices on world markets via its effects on production and economic activity; fossil fuel prices have an impact in multiple ways (through the cost of fertiliser, storage, refrigeration and transportation) throughout food supply chains. We show that in 2022, climate change and fossil fuel prices could cause food inflation to be around 11%. This translates into an increase in average household monthly spending of £33.90, £14.23 of which is estimated to be due to the effects of climate change and £19.66 due to energy prices, suggesting that the majority of the current increase in food inflation arises from fossil fuel price shocks on world markets. In context, these factors could increase household shopping bills in 2022 by more than £400 per year and the total annual UK food shopping bill by around £11.4 billion. Looking beyond the current crisis experienced on world markets, both fossil fuels and climate change will continue to be important for UK food prices. This report highlights these two factors as key drivers of food prices. In compiling this report, we draw on recent scientific and economic research to provide insights into their potential importance. Of course, we recognise that other factors that we have not explicitly accounted for directly in these estimates, including responses of stakeholders in the food chain, may reinforce or offset these effects. Nevertheless, and bearing this caveat in mind, our findings suggest strongly that climate and fossil fuels are currently dominant factors in determining the costs of food for UK households.