Diddly Squat

Current shortages of some fruit and vegetables are a harsh reminder how fragile the UK’s food supply chain is.

The ‘clock is ticking’ for the UK government to protect homegrown food supply, the National Farmers’ Union (NFU) president recently warned. Speaking at the NFU annual conference, Minette Batters said that farmers are being hit by labour shortages, higher costs as well as the impacts of climate change and global political turmoil. The NFU estimates farming costs have risen by almost 50% since 2019 driven by higher energy bills and fertiliser costs amongst others. The poultry industry has also been severely affected by the largest recorded outbreak of bird flu and egg production has fallen to almost a 10-year low. The NFU has said the country must ‘never take our food security for granted.’

Households are seeing the result of these issues in higher prices in supermarkets. UK food inflation hit a fresh record-high in February, moving above 17%. The Bank of England is expecting inflation to fall sharply as the year progresses, but grocery prices could prove to be one of the stickier components within the data. The head of NFU Cymru has also warned that besides higher prices, UK shoppers could be faced with less choice on supermarket shelves. Sadly, food is just not coming through the system due to empty sheds that should be growing fruit and vegetables or rearing poultry. In addition, Brexit has created its own challenges for the UK farming industry.

Food security issues have been highlighted by UK supermarkets introducing limits on purchases of certain fruit and vegetables, due to a shortage of fresh produce. Tomatoes, peppers, and bags of salad have been most affected. This follows extreme weather in Spain and North Africa. Climate change remains a real risk and the UK has had its driest February in 30-years, raising fears of another drought this summer.

The UK government needs to listen to the farming industry, otherwise we could risk finding ‘diddly squat’ on supermarket shelves more often.

 

What have we been watching?

Rising optimism over the global economic outlook has been a major theme this year aided by China abandoning its zero Covid policy. At the same time markets have had to grapple with the outlook for central bank monetary policy. The ‘hotter’ than expected recent economic data has prompted a re-pricing of interest rate expectations, particularly in the US, with a shift to a ‘higher for longer’ stance. Not surprisingly, markets therefore continue to focus with laser precision on inflation data.  US bond yields have continued to edge higher with the 10-year US Treasury yield briefly back above 4%.

Tension between the US and China remain elevated. Besides the FBI saying the Covid-19 outbreak originated in the lab in Wuhan, the US has approved the sale to Taiwan of $619m of munitions for F-16 fighter jets which is likely to anger Beijing. Meanwhile, China has said it intends to increase its military spending by 7.2% this year.

 

It looks as if the six and a half years of Brexit uncertainty could finally be coming to an end. The ‘Windsor Framework’ should remove the threat of a tit-for-tat trade war with the UK’s biggest market, the EU and is exactly what businesses and financial markets need. This should improve confidence and unlock business investment. For example, the UK will be able to re-join the EU’s £84bn Horizon Europe scheme. Whether ‘Eurosceptic’ Conservative MP’s and the DUP agree that the deal is a good one remains to be seen, but it is expected to pass through parliament with the backing of more than enough MPs across the Commons including Labour. Might this also  pave the way for a trade deal with the US?

 

In Europe, inflation data for France, Germany and Spain was higher than expected which is likely to lead to a continued ‘hawkish’ stance from the European Central Bank (ECB). The Eurozone CPI dipped from 8.6% in January to 8.5% in February, but did not drop as much as expected.  EU interest rate futures are indicating a further 0.5% interest rate hike from the ECB at its next meeting on 16th March and peak rates of 4%.

 

In the US, the ISM manufacturing indicator was largely in-line but the prices paid component moved back into expansion territory after four months of deceleration. US interest rate futures have continued to tick-up with a peak rate of 5.5%-5.75% now being mentioned.

 

The new governor of the Bank of Japan provided some more insight on where Japanese monetary policy is going. He said the central bank cannot keep government bonds for ever and may look at targeting shorter bond maturities in the future with an inflation target of 2% to remain. Government yield curve controls have been in place since 2016 so any easing of the rules might see monies flow back into Japanese assets and so support the Yen.

Read our latest Chinese investment insights from Alpha PM

 

China saw an improvement in manufacturing activity in February with the Caixin indicator recovering to 52.6 while the services sector jumped to 56.3 reflecting the re-opening of the economy from its zero Covid policy.  Chinese Premier Li Keqiang said he expects the country’s economy to grow by around 5% in 2023.   

Read our latest investment insights from Alpha PM

 

Despite interest rate expectations shifting higher Brent oil edged up to $85.

Finally, the law of unintended consequences as the UK shifts to electric vehicles. Garages could face a skills gap as EV’s will require training in electrical safety. The Institute of the Motor Industry is forecasting a shortfall of 37,500 car technicians by 2030 – without government support. While brand-new EVs are likely to be under warranty and serviced by franchisees, this shortage of technicians could be a challenge for the second-hand EV market where owners may rely more on independent garages.

 

Read Last Week’s Alpha Bites – War, what is it good for?

 

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