Why your food shop is about to cost more

0:02Paul Kelso:Sky News, the full story first.

0:11Paul Kelso:You'll have already noticed what's happening at the petrol pumps. But did you know the price of food produced here in the UK is due to rocket thanks to the Iran war? And this is why.

0:33Paul Kelso:Hi everyone, Neil here. We are now entering the fifth full week of the Iran conflict. And already we have seen the very direct effect it has had on the cost of filling up your car. Because the one thing war is good for is driving up prices. And that's something Britain's farmers know only too well. The price of that gas has gone up 92 % in four weeks, which is absolutely staggering. if the prices stay where they are. Disaster. Yep, there is stuff by the rising cost of fuel and energy as the rest of us, even more so in fact. But they're also being hit by bills you might not immediately think of.

1:11Paul Kelso:Again, as a direct result of the Iran war, fertiliser is key among them. For a variety of reasons, they can't pass those costs on to the consumer. Not yet anyway. But make no mistake, a big increase is on the way. Our business correspondent Paul Kelso has been down on the farm. Paul, we're going to be talking about fertiliser a lot. And look, as someone from Ayrshire, west coast of Scotland, I thought I knew what fertiliser was. It's that stench that comes through my window every spring, summer time. But we're not talking about the manure, are we? No, you thought it comes from a by-product of beef, shall we put it that way?

1:46Yes. Well, some fertiliser is, some fertiliser dig out of the ground, but the bulk of synthetic fertiliser that is responsible for, or by some estimates, producing 40-50 % of global food production, is essentially an energy product. It's made from natural gas. Sorry, wait a minute.

2:05Paul Kelso:I thought you drilled for nitrogen or you dug for nitrogen. You burn for nitrogen. You burn for nitrogen. First, you take natural gas and you take the hydrogen from that methane and combine it with nitrogen in the air to create ammonia in various forms, which most frequently ends up in some kind of liquid nitrogen fertilizer. It is an energy product and that means if energy prices are going up, specifically natural gas, the price of fertilizer is going up and that is exactly what has happened as a consequence of the war in Iran. So wait a second, if this is a by-product of the oil industry and the refinement that goes on in and around the Gulf, the blockade of the Strait of Hormuz has had an effect already then?

2:45Absolutely. People will be very familiar. 20 % of the world's oil comes through the Strait of Hormuz normally, not at the moment. Well, between a quarter and a third of the trade in nitrogen globally comes from the Gulf too, and that is not moving. It's either not moving because it can't be shifted because of the blockade, or frankly, with the attacks on gas infrastructure that we've seen possibly not being produced at all. So that creates a big hole in global production at precisely the wrong moment in Europe, into Asia, this is the growing and planting season. This is precisely when it's needed.

3:20Paul Kelso:So what on earth are fertiliser producers actually doing now? They look further afield. There are other sources of it. If you've got natural gas, it is made around the world. It's not just in the Gulf, but it is pushing up prices. So you look at urea, which is the most common form of nitrogen fertiliser. That is up from around$300 a tonne at the turn of the year to, I just checked nearly$700 as we approach the end of this month. In the UK, we are not self-sufficient for fertiliser. You'll be astonished to hear. We make about 40 % of what we need, but it relies on natural gas. We know we have massively high industrial energy prices.

3:57We've talked about this before. So we import a lot. I went to a fertiliser producer and that is imported from Trinidad. Trinidad. Why there specifically? Trinidad has access to enormous gas fields, the same gas fields as Venezuela. In fact, I think it's called the Venezuelan gas field. And they have production facilities dedicated to the production of, in this case, urea, ammonium nitrate, liquid form, which comes in. Trinidad has shot up the list of places the UK imports from since the war in Ukraine. Russia was a big exporter because of its gas reserves. That's been choked off. So in the UK, we look to Europe, we look to Egypt, and increasingly we look to Trinidad.

4:37Paul Kelso:So these costs, the rising cost of fertilizer, I mean, are the people who produce our crops, are they having to absorb that? Or is fertilizer something you can do without if you are growing these sorts of fruit and vegetables? You can do without, but you have a choice essentially right now. Unless you've, like many of these issues we talked about, your gas price, oil prices, and fertilizer prices, if you agreed a price before this war began and it was wending its way to you on a container ship or a tanker, you should be okay. But right now, farmers who are ordering right now have a choice. They either pay much, much more and probably absorb the cost, or they don't apply the fertiliser.

5:16And if they don't, they're looking at perhaps half as much yield. So one way or another, you're either paying more for the same crop as last year or producing much less. One way or another, that is going to impact consumers. It's certainly going to impact farmers and growers' bottom line.

5:30Paul Kelso:All of which explains why you got the wellies and your gilet on and went down the farm. Somewhere in the Lee Valley, I think it was. Yeah. So in fact, the Gillier was probably overdressed for the glass houses. The Lee Valley is amazing. It's a centre for horticulture production, has been since the 19th century, because back then it was a day's coach ride from Covent Garden Market. It's flat. It's wet. There's lots of water. You've got the Lee River. You could get it to market quickly. Now there's still hundreds of acres of glass houses, multiple football pitches worth 70 miles of tomatoes in the one I was in.

6:01And the same again for everything. And I hate tomatoes. Well, you wouldn't have liked it. They're in rows and they run up and down, up and down in a greenhouse for the tomatoes, which is 22, 23 degrees centigrade. Beautiful. It's got that just stepped off a plane in the evening in the Mediterranean for your holiday feel when you walk in there. And it's kept at that temperature by miles and miles and miles of pipes containing hot water, which is heated by a gas boiler. So you've got hot water to create this temperature, which is permanently on, and you've got fertilizer being piped directly into the bedding in which these plants grow.

6:37Yeah, but what about the energy price cap? There's no energy price cap for business. Crucial thing to remember, right now, consumers are protected. We all know. We've got certainly till the summer before we get hit, but there's nothing for business. Now, you might be protected by your own contractual arrangements. The place I was, they have some of their gas bill fixed, but they leave it floating. because when you're using vast amounts of gas as they are, if, as it was two months ago, you're talking 65p a therm one day and 63p the next, that savings worth having. They've seen their energy price in the last four weeks go up 93%.

7:11So how are they coping? I mean, genuinely, how are they able to survive? Well, it's eating into their bottom line. They have a number of pickers and staff there right now. They're getting the plants ready to go, but they're about to bring in hundreds of people. But they can't pass these costs on. They can't push the wages any lower. It's a minimum wage thing. They've agreed their prices with the big supermarkets, all these growers, back in September.

7:35Paul Kelso:So they're contractually obliged to sell the stuff at the price that they set last September, despite the fact that since then, fertiliser through the roof, energy costs through the roof, and you're paying more than NI as well. Absolutely. And they're at a crossroads now. For some of them, they've got a choice. They either cut their losses now because they're not going to get any more known for the product, or they keep going and lose even more, but sell the produce their own for. It's pretty serious for the growers. Now, I can understand why there has been a huge amount of interest in fertilizer prices when it comes to the sorts of farms that you've just been describing.

8:08Paul Kelso:But going back to where we started this conversation, I don't associate fertilizer with cattle apart from the fact that they produce it. So what's the link here? You went to a beef farm. Absolutely, yeah. You shovel what they produce on your roses. The role in livestock is feed, the pasture they grow on. So I went to a beef farm in Gloucestershire, David Barton, who heads the National Farmers Union's Livestock Board. He's somewhat from Central Casting. It's a small farm. He does it all himself. He is working very hard right now. It's peak calving season. He hadn't had much sleep when he took time to spend time with us.

8:41But the USP of that cattle is that it feeds on Gloucestershire grass. and he can double the yield from that grass if he puts his nitrogen fertilizer on it. He goes to order it. He doesn't need it till now. So he doesn't order it in advance. Cashflow doesn't want to lay out the money. He orders it. 375 quid has turned into nearly 500 quid a ton. And he's told he can't get it till April, but he needs it now. He doesn't just need it now to sustain the calves that are being born now and the ones that are nudging a year old that will be harvested, as he euphemistically put it, later this year. not just through the summer, but he needs to cut that pasture one, two, three, perhaps four times to fill his barns with silage to feed them through the winter.

9:24He's on his last bit of the winter feed. And last year, he couldn't feed them from his pasture because it was so dry that the grass wasn't growing. So it's a double whammy and it's really important. So if he doesn't get the, well, he's bought the fertilizer, but it's costing more. Again, beef, that's a global market. the price, he's a price taker, as he put it, that's set on global markets. So he can't pass that on immediately, not in full.

9:50Paul Kelso:Particularly when you're getting low price beef as a result of, you know, trade deals that we've struck from literally the other side of the globe. Absolutely. They've got under pressure from deals done with Australia. I mean, of course, we had a deal, there's now Trade Cango between the US and the UK. I've spoken to him about that in the past. He's very happy to bet his Gloucestershire steaks in a New York restaurant against what the US can sell us. But he's being squeezed further. And his point is, it's another squeeze on small food producers. They can't necessarily pass it all on. And it raises questions about not just sustainability of his business, but our food security, something farmers have talked about regularly through the last year or two.

10:32Paul Kelso:These three aspects of the supply chain the fertilizer producer the fruit and veg the beef the people that you spoke to i mean how long do they give it i mean was there a touch of fatalism about them or are they they still think that they can weather this storm yeah i mean they're resilient businesses but by definition ones who are willing to talk to us are the ones who've got a plan they are going to have to suck a lot of this up but they think it's almost inevitable this will show up in consumer prices at some point. The question is, when? If you can't pass it on immediately, you get the feeling that I was watching, let's go back to Great Yarmouth, where the fertilizer was being loaded onto tankers turning up to take it all across from Scotland to the southwest.

11:14That's going to be sprayed on crops to make them grow. But you also got the feeling that's spreading food inflation as it goes. Because whether it's right now, when it comes to be harvested, perhaps the fertilizer, people might want to bank ahead of next year, it's got to show up because you can't have these kind of costs without some of it flowing onto consumers.

11:32Paul Kelso:We're talking about energy costs up by almost 100%. We're talking fertilizer up by 75%, according to the farmer you spoke to. I mean, we are talking ridiculously significant increases in the prices of things at the supermarket, surely. Yeah. And we've just had, you know, unfortunately, we've got recent case study, haven't we? after the ukraine war the ukraine invasion by russia we saw let's call it 10 percent it was a bit 10 10 inflation 11 at the peak driven largely by food food inflation has been above five percent for a long time the overall basket of goods it has dipped down a bit you know one of the ironies here is fertilizer prices went up then as well went up much more than they have done now you know we're still in the foothills of the kind of energy price spikes we saw then but as someone point out at least then prices went up ukraine russia big cereals producers so cereal prices spiked i think the input cost has gone up but at the moment the prices of the commodity you're selling at the end haven't gone up so we've seen 10 as a benchmark for food inflation which has hammered families hammered people for several years you know the fertilizer producer he said he thinks it could be even worse than that so that this you know it hasn't showed up yet like But many of these, the answer to the ultimate question is, depends how long the war lasts.

12:49But it does feel like this is in the post.

12:51Paul Kelso:You and I have talked often about energy security, the idea that we don't produce all the energy that we need in this country. Food security. I mean, that, I suspect, is going to be something, if, again, we see a shock in the overall price of the average household weekly bill, we see a significant increase in that. People will be asking questions of the government, the likes of which they've been asking about energy. They've been asking very recently about defence, and I think it's going to look pretty embarrassing for them. We have to accept where we are. This is pressure on food supplies and the cost of food specifically, domestically, coming in a country that is not self-sufficient, hasn't been self-sufficient for hundreds of years, and has been significantly less so certainly since the war.

13:36I mean, it probably still remains the case that the most vulnerable point in the food chain for Britain is the Straits of Dover, and the imports that come in every day. Remember, these fertilizer costs are going up everywhere, so that's not going to provide insulation. But the amount of food we do produce starts to feel more fragile the more pressure is put on those who are producing it. And at the moment, it's important to remember, consumers, we do incredibly well in this country. We enjoy incredibly cheap food. It doesn't feel like it right now. It doesn't feel like it, but compared to the continent, Do you recall when we had what were called initially shortages of salad, veg, a couple of winters back?

14:16Is this a Brexit effect? Is this a post-Ukraine effect? One of the reasons it wasn't affected that is that you get a better price in France and Belgium and Spain because consumers are willing to pay more. And we have this, you know, the massive supermarket sector. That competition has driven down prices for consumers. But that really hits producers hard. here, the combination of these effects, the more pressure on the smaller number of consumers we have, the more pressure there is on domestic food. And one thing I think everyone agrees on, we like food to be grown at the end of the road, don't we, rather than the other side of the world.

14:48Paul Kelso:So perhaps the only thing that we can be certain of, Paul, is that at some point in the not too distant future, we should probably expect a few tractors around Parliament Square. Yeah, if they've even gone home. I mean, they've settled inheritance tax, but we can expect farmers have not been slow in coming forward and they've had some wins. But I think we can appreciate that, you know, these costs going up like this puts everyone under pressure and they're in the front line. Paul, thanks very much. That's your lot for today. Much, much more on the Iran war is available on your podcast feed. Just scroll backwards, a couple of episodes from Michael Clarke you might want to take a look at.

15:22Paul Kelso:And as always, do get in touch with your thoughts, your comments on today's episode. What more do you think the government can do? What can we do to insulate ourselves against these rising costs? This is why it's back again tomorrow. Thank you.