Chicken Nuggets

 

The cost-of-living crisis affects all of us, but more so lower income households. Energy costs have jumped due to the war in Ukraine and this is having a spill over effect on food prices. Chicken is the UK’s meat of choice for the dinner table and is a good example of how higher input costs are adding to the inflationary spike. Poultry accounts for approximately 50% of the meat eaten in the UK and one billion birds are reared in the country every year.

The boss of Co-op supermarkets has warned that poultry could become as expensive as beef – the price of chilled, oven-ready chicken has increased from £2.50 to £3 per kilo in the last two years. One of the UK’s leading food processors 2 Sisters Food Group believes that price of chickens from the farm gate has risen by 50% in a year.

Hatcheries have come under pressure as the cost for feed, electricity and heating for the incubation period have gone up. The price of chicks has gone up by 5p over the last year to 40p per bird. Farmers, in turn, have been hit by higher energy and feed costs, while the cost of wooden shavings for bedding has risen by 40%. Poultry processing plants have seen similar input costs and have also taken a hit from buying C02 which is used to kill the chickens. The cost of C02 has skyrocketed. All of these businesses, along with the supermarkets, have incurred higher packaging and transport costs. This is due to the war in Ukraine and jump in the price of oil.

The Bank of England is in effect playing a game of chicken – raising interest rates to tackle inflation, but risk hurting consumer and business confidence even more and tipping the economy into a prolonged recession. While some inflationary pressures may ease, it looks as if the days of cheap food is over. The problem for the Bank of England is that there are an endless number of industries with similar cost input challenges. UK companies are seeking to raise prices to protect profit margins – the problem is higher prices leads to higher inflation.

What have we been watching?

The World Bank cut its global economic growth forecast for the second time this year. The growth forecast has been cut from 3.2% to 2.9% and compares with an estimate of a 4.1% increase at the start of the year. The US economic grow outlook is lowered from 3.7% to 2.5%. China moves from 5.1% to 4.3% and the EU from 4.2% to 2.5%. The cuts are driven by higher energy and food bills and supply disruption due to the war in Ukraine. Meanwhile, the OECD updated its global economic forecasts with 3% growth projected for 2022 and 2.8% for 2023.

Globally, more central banks are hiking interest rates. The Central Bank of India announced a further 0.5% increase, 24-hours after the Reserve Bank of Australia announced a 0.5% hike, which was twice as big as expected.

President Volodymyr Zelensky said the fate of the eastern Donbas region may be decided in the battle for Severodonetsk. Meanwhile, Turkey’s foreign minister said a United Nations plan to re-start Ukrainian grain exports along a sea corridor was ‘reasonable’, but would require further talks between Moscow and Kyiv. Any deal could involve a Turkish naval escort for tankers leaving Odessa and other ports that are currently blockaded by Russia. Meanwhile, Moscow has said that western sanctions must be lifted before Russian grain can be delivered to international markets. Sanctions are affecting shipping insurance, payments and access to European ports.

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PM Boris Johnson technically survived the confidence vote but 41% of his colleagues voted against his leadership. The voting was 211 to 148 – worse than Theresa May and she survived just six months, so his hold on power is thin. Expect him to announce increasingly desperate populist policies with the writing on the wall. He is seriously, if not mortally, wounded and the two by-elections later this month look to be quite a challenge. Sterling remained around $1.25 during the week, but is now trading lower.

In the UK, BRC retail sales were down for the second month-in a-row in May. Sales fell by 1.5% on the same time last year as the cost-of-living crisis continues to impact households. The OECD cut its UK economic growth outlook for both 2022 and 2023 to 3.6% and ‘zero’ respectively. UK growth is set to be the worst amongst the G20 leading economies with the exception of Russia. Today’s data confirmed the UK economy unexpectedly shrank in April (-0.3% from March), which may persuade the Bank of England to move cautiously, reducing the risk of a 50 basis points rise in interest rates. Fortunately, the UK stock market is not the UK economy. Nonetheless, a slowdown in growth will add even more pressure on Boris Johnson to cut taxes!

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CPI Inflation hit a fresh record high of 8.1% in the 19-member euro area in May. The European Central Bank (ECB) announced that it intends to raise interest rates by 0.25% in July after the end of its formal asset purchase programme (QE). The ECB expects a further hike in September depending on the inflation outlook. The ECB currently expects inflation to be 6.8% in 2022 and to ease back to 3.5% in 2023. Its economic growth forecast for the EU region has been cut to 2.8% for 2022 and to 2.1% in 2023. As a result of these inflationary fears, the expectation for a more aggressive rate hike in September has gained momentum and bond yields in the Eurozone continue to rise, in particular for “peripherals” or members with a lower credit quality.

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To make things worse, we had the hottest US inflation in four decades, suggesting the Fed will need to raise interest rates more aggressively. This has led to the US yield curve inverting as concerns on economic growth mount. Money markets are pricing 175 basis points by September, implying two 50bps followed by a one 75bps hike over the coming months. This triggered a global equity selloff on Friday which has continued into today’s trading session.

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China’s exports re-bounded strongly in May as Shanghai started to emerge from lockdown. Exports were up 17% on the same time last year and almost 4% higher than in April.

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Brent oil edged up to $121. Saudi Arabia raised the official selling price of its flagship Arab Light crude oil to a $6.50 premium to the average of the Oman and Dubai benchmarks.

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Finally, thousands of UK workers have started a 4-day week trial for six months. The experiment has been organised by a group campaigning for a shorter working week, but for no loss of wages, to see if it improves productivity.  Meanwhile in the US, Elon Musk, the Tesla CEO has changed his view on WFH. He said ‘anyone who wishes to do remote work must be in the office for a minimum (and I mean minimum) of 40 hours per week or depart Tesla’. Subsequently, Tesla has announced it is to cut its workforce by 7% after the ‘most challenging’ year in its history. An electric shock?

 

Read Last Week’s Alpha Bites – Left in the Dark

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.