How escalating conflict in Ukraine deepens Britain’s food price woes
Eir Nolsoe
4 min read
Grain storage sits underwater after the collapsed of the Kakhovka Dam - AP Photo
When the Kakhovka dam burst in southern Ukraine last week following a suspected Russian attack, President Volodymyr Zelensky condemned “an environmental bomb of mass destruction” as water flooded hundreds of thousands of hectares of agricultural land.
Ukraine is known as Europe’s breadbasket, as it is one of the world’s largest exporters of grains and wheat. It is also a major producer of sunflower oil, an ingredient in many foodstuffs.
The disaster instantly triggered a spike in global wheat prices and raised fears of a wider rise in global food costs.
“This escalation has taken a lot of people by surprise in terms of its scale because we are talking about something approaching 500,000 hectares of farmland affected,” says James Walton, chief economist at the Institute of Grocery Distribution (IGD).
“It is worth noting that Ukrainian farmland is actually some of the finest in the world, as it’s particularly fertile.
“It’s pretty clear that this flooding and the aftermath mean that a lot of farmland is going to be knocked out of production, possibly 2pc or 3pc of everything that Ukraine has. There’s no clear timeline for getting it back into good shape, even if the war were to end tomorrow.”
However, Walton says British shoppers will also feel the impact at the tills as a squeeze on global wheat supplies drives up prices across the board.
“We are presumably going to see global markets looking for alternative sources of supply. That might well push back the timeline for a return to more normal food pricing,” he says.
What is more, the dam burst just as US scientists confirmed that a weather event known as El Niño had begun. It brings one of the most powerful fluctuations in the Earth’s climate system, causing yet more disruption to global farming.
The phenomenon is expected to make 2024 the world’s hottest year, bringing drought to Australia and weakening India’s monsoon. The extreme climate threatens to drive prices even higher.
Ole Hansen, the head of commodity strategy at Saxo, says the combination of El Niño and the disaster in Southern Ukraine is particularly troublesome.
He said: “Combined with the current hot and dry weather, it is a pretty potent cocktail that we need to be aware of and keep an eye on.”
While prices are currently influenced by last year’s crop, the outlook will become clearer in the coming months, he says.
“We’re most certainly not out of the woods when it comes to food security.”
Food prices in the UK have been rising at close to the fastest rate since the late 1970s, piling misery on stretched families and pushing up overall inflation. In April, groceries cost 19.1pc more than a year earlier.
Soaring food prices mean inflation has come in higher than expected for the past two months, prompting the City to predict that the Bank of England will be forced to raise interest rates to 5.5pc.
The peak may prove to be even higher. Analysts at Deutsche Bank warned in a note to clients this week that El Niño “and the Ukraine flooding could provide an additional inflationary impulse.”
Governor Andrew Bailey recently said that food producers were not passing on falls in the cost of raw materials following a peak last summer.
He said this meant inflation had not fallen as fast as expected and seemed to reflect that manufacturers were “rebuilding” margins.
Should global food prices start rising again, costs would likely be passed on.
Walton believes that food inflation will still slow but he says the latest crisis will delay its return to normal levels.
The uncertainty adds to doubts over whether Chancellor Jeremy Hunt will be able to reach his target of halving inflation by December. To meet that goal, it would have to fall from its current rate of 8.7pc to 5pc by the end of the year.
Yael Selfin of KPMG says the target should still be within reach. However, if food price rises prove persistent Hunt will be faced with a narrower and narrower path to walk to reach his goal.
The rising cost of groceries will also ramp up pressure on Rishi Sunak to help households struggling with the weekly shop.
The initial reaction to the proposal suggests it would be unpalatable to the right wing of the Tory Party. However, if shop prices remain elevated or in fact start climbing again pressure for action will mount.
For Britain’s poorest households, the impact from even higher food prices would be immediate.
Ms Selfin says: “Poor households are impacted by it the most because it represents a bigger chunk of their spending basket. This is really impacting those that are most vulnerable.”
Clearly, the Kakhovka dam attack is more than just a military provocation from Moscow with implications for households across Britain.
