The establishment by the Scottish Government of a food security task force is a necessary and timely response to the war in Ukraine. In addition to the harrowing humanitarian crisis, the conflict has prompted significant concern among food producers. The UK food sector and consumers are currently facing a perfect storm just as we begin to emerge from the pandemic. Amid rapidly rising labour and energy costs, the war in Ukraine adds significant disruption to global supply chains which will, in turn, raise factory gate prices.
The food industry has proved resilient in recent years, and has largely managed to cope with trade and regulatory disruption over Brexit and changing consumer habits triggered by the pandemic.
The new task force recognises the realpolitik that food security and stability of supply is an issue the impact of which will soon be keenly felt. While the UK is largely self-sufficient in wheat, it is a global commodity, and with 30% of global wheat production sourced from Russia and Ukraine, price rises and shortages are inevitable. Less obviously, 80% of the world's production of sunflower oil is also sourced from these countries. Alternatives to this may need to quickly be identified or items such as the humble potato crisp will soon become a luxury. Globally, governments should seek to keep markets open as opposed to becoming protectionist, but open markets mean sales go to the highest bidder, with consequences for poorer countries dependent on imported foods.
What can food producers do?
Geopolitical shocks like this cannot be absorbed without pain, and the speed of change has been dramatic. Buyers and manufacturers may have fixed their supply prices in advance in good faith but may be powerless to prevent price rises being forced upon them. In addition, it may not be possible to meet supply commitments in full or at all. Truly, this is force majeure with a vengeance.
Suppliers, processors and manufacturers should look to their commercial engagements and discuss openly with counterparties how to deal with rising production and energy costs and the consequences of short supplies. It may be that we see the necessary emergence of simpler or alternative product ranges. Additional working capital may be needed as margins are eroded or businesses are forced to rely on more expensive sources of supply. Credit risk and bad debt exposure may also increase, requiring dialogue with, and support from, banks.
At times like these the interconnected nature of the food industry will be stress tested and it is welcome news that the Scottish Government's task force includes expertise from James Withers, Chief Executive of Scotland Food & Drink, and David Thomson, Chief Executive of Food & Drink Federation (Scotland). Governments across the world will need to protect the interests of their populations and ensure food security and supply issues do not escalate into food poverty and scarcity issues. Increased support for primary agriculture must be made a priority to maximise production (ideally in a sustainable way) and regulatory changes should be put on hold, or existing regulations reviewed, to limit (even if only temporarily) unnecessary burdens on producers and suppliers.
The primary objective must be security of supply, so consideration might be given to putting fallow and set-aside land, or land designated for re-wilding, to productive use. However, this may sit uncomfortably with the all-important drive for sustainability. More controversially, much grain production is typically destined for animal feed for cattle and chickens. Perhaps the time is ripe to incentivise and rebalance production and supply for more direct human consumption with the added bonus of reduced animal emissions?
Urgent intervention in and support for the agri-food sector is surely justified more than ever before.
For more information please contact George Frier, Partner and Head of Food & Drink, at george.frier@shepwedd.com, or your usual Shepherd and Wedderburn contact.