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This is a transcript of episode fourteen of the Down to Agribusiness podcast. Visit the show page here.


The Brexit Effect: Hiked bread prices are looming for UK consumers after UK wheat price surge

Gareth Moore

Hello and welcome to episode 14 of the Down to Agribusiness podcast – I’m Gareth Moore.

UK wheat prices have surged considerably since the UK voted to leave the EU back in June 2016, backed by a decline in the British pound. These costs are now making their way down the supply chain with hiked bread prices looming for UK consumers.

I’m joined by Senior Softs and Grains Analyst for IEG Vu, Sandra Boga. Hi Sandra.

Sandra Boga
Hello

Gareth
How have UK wheat prices changed since the Brexit vote?

Sandra
The price of wheat has most definitely increased as a result of the Brexit vote. UK feed wheat currently stands at around 142 pounds per tonne compared to averages of around 126 pounds per tonne pre-Brexit, so before June 23 2016. This means prices of UK wheat have risen on average by around 12% from pre-Brexit levels till now. In July prices even reached a peak of 156 pounds per tonne which was a 24% increase from pre-referendum levels and the highest this contract has ever seen.

Gareth
And, what led to this price surge?

Sandra
Most definitely the decline of the pound has had a significant impact on UK wheat prices. Since the Brexit vote the pound has fallen in value against each of the currencies used by the world’s 16 biggest economies. Before the referendum the pound was worth USD1.45 and EUR1.30, but now stands 11% and 15% lower against the two currencies respectively.

Gareth
How does UK wheat compare to other global wheat prices?

Sandra
Well, at a recent event, the UK Agricultural and Horticultural Development Board (AHDB), indicated that UK feed wheat futures prices have from moved being the cheapest to most expensive contract globally, since its launch. As a comparison, in the last 2 years (Sept 2015-Sept 2017), the US CBOT wheat futures contract has fallen by 10% in value. Paris Milling wheat futures have also seen quite a significant decline during the same time period.

The contract is currently at EUR167/tonne compared to levels of EUR159 in August 2017 and if we compare to levels around the Brexit vote in June 2016 of around EUR180, that’s a drop of 7-11%. Prices for Canadian milling wheat have also fallen by 8.5% over the past three months, although they remain 4.2% higher year on year.

Gareth
So, is this currently impacting bread prices?

Sandra
Yes, according to news circulating this week, Allied Bakeries have warned that it would be forced to pass on losses incurred in the wake of surging wheat costs. Allied, which includes products from Kingsmill and Allinson’s, has recently reported losses which it associates with increasing wheat prices along with lower retail prices to cause.

The CEO of parent Associated British Foods also outlined that the current situation was “unsustainable” telling investors the bakeries business was now holding “negotiations and discussions” on price recovery with retailers. UK bread wheat prices are currently up around 20% year on year according to the National Association of British and Irish Flour Millers.

Gareth
So what does this mean long-term for bread consumers?

Sandra
Although, the price of wheat is on the rise, this is not the sole factor in determining the price of bread – the costs of other ingredients and the competitive actions of retailers in response to a difficult trading environment also have key roles to play. As does the volume and quality of the UK wheat crop. Since the UK had a variable harvest this year, the proportion of grain meeting the main bread-making wheat specification was down. Which again affects the price locally as well as leading to a higher dependence of imports.

But in terms of macro-economic factors, as it stands, the British pound is unlikely to make a dramatic recovery any time soon, with Brexit negotiations not showing signs of culmination either. So as we hang in limbo with that, bread prices are not expected to drop in the near future.

Gareth
Thank you, Sandra

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