Contact: Katie Broome
Deloitte & Touche LLP
+44 020 7303 6359

World economies are in a race to find alternatives to fossil fuels. Turning crops such as wheat and corn into ethanol or, oilseed rape and palm oil into bio-diesel will have an impact on farmers, manufacturers and food supply the world over. According to Deloitte, the business advisory firm, the knock-on effect on UK agriculture is likely to spell price increases of staple foods for UK consumers.

Mark Hill, food and agriculture partner at Deloitte, comments: “The price of corn has doubled in the last 12-18 months, up from US$2/bushel (US$70-80 per tonne), to over US$4/ bushel (US$160-170 per tonne). Similarly in June wheat prices across US and Europe hit their highest levels in more than a decade. 

These price hikes are likely to trigger inflation in food prices as processors are forced to pay increased costs for basic ingredients such as corn and wheat. The impact may appear obvious on direct products like bread but it is likely to also have an impact on other foods we consume.

Looking specifically at bread UK flour millers require 5.5m tonnes of wheat for the 4.5m tonnes flour used to produce the 12m loaves sold each day in the UK.  The majority of this wheat is grown in the UK and in the last year milling wheat prices moved from around £80/tonne to £130/ tonne.

Hill added: “A simple way to understand how the price rises might impact the cost of manufacturing a loaf of bread is to break it down. Wheat cost represents just 10% of the price of a loaf and whilst wheat prices have increased by 50% the effect on bread prices is moderate. 

“This means for every £10 per tonne increase in wheat price, the cost of making a loaf of bread is likely increase by 1 pence, so the £50/tonne increase in wheat price is likely to translate into a 5p cost increase in a loaf of bread.” 

Other produce likely to be affected is meat. White meats such as poultry and pigmeat use grain to feed the animals which forms a substantial part of production costs. Whilst arable farmers on the one hand enjoy good prices for wheat and corn, dairy and livestock producers on the other may well struggle in this environment and prices of milk and meat may well have to rise to sustain domestic supply.

Hill added: “Overall, the long-term supply and demand issues for grain could to lead to sustained increases in the price of food commodities. Looking to the future there is no clear sign that is situation will improve for several reasons.

“The world population is set to rise from 6 billion to 9 billion by 2050 growing at 73 million a year, the equivalent to the population of Germany. On a global level rapid economic growth and consumer affluence in China and India could lead to double the amount of grain consumed in the next 40 years and production may not be able to keep up with demand.”  

Drought and floods have threatened many harvests in grain-producing regions. Bad weather in 2006 has reduced output and pushed up prices around the world. The ‘biofuel effect’ and the move to make energy from crops also plays a part. Over 20% of the US corn crop is now used for bioethanol production which suggests wheat price is only headed one way. 

Whilst the EU has 4 million hectares in set-aside land which could return to farm production, much of this land is in environmental schemes. As a result it is unlikely to be economic to cultivate it.

Hill added: “Stocks at all points in the food chain have been run down and consequently there is no price damper on production volatility or safety net when world demand for grain exceeds production.”

Ends

About Deloitte:
In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms.  Deloitte & Touche is the United Kingdom member firm of Deloitte Touche Tohmatsu ("DTT"), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other's acts or omissions.  Services are provided by member firms or their subsidiaries and not by DTT.  Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.