Prices are rising at the fastest pace in decades, creating a cost-of-living crisis that's forcing people around the world to make tough choices about what to buy.
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A customer shops for food items inside a Tesco supermarket store in east London on January 10, 2022. - UK annual inflation rocketed last November to 5.1 percent, more than double the Bank of England's 2.0-percent target -- price rises for fuel, clothing, food, second-hand cars and increased tobacco duty all helped drive up inflation. (Photo by Daniel LEAL / AFP) (Photo by DANIEL LEAL/AFP via Getty Images)

The United Kingdom is no exception: inflation hit a 40-year high of 9% in April and is forecast to peak above 10% toward the end of this year. The high cost of fuel and heating is just part of the problem. Food prices have also leaped, climbing nearly 7% compared with a year ago, according to data released Wednesday.

A big part of the problem is the soaring price of dairy products. The cost of milk, cheese and eggs — supermarket staples — shot up 9.5% in the 12 months to April. The price of whole milk rose more than 12%.

In the United States, wholesale milk prices jumped 38% last month year-over-year, while the retail price of fresh whole milk was up 15%.

There could be more pain to come, according to a recent analysis by Kite Consulting, which specializes in the UK dairy industry. Between 2020 and 2021, a standard four-pint carton of milk cost between £1.10 ($1.36) and £1.20 ($1.49). This year, it could reach £1.70 ($2.11), the consultancy said. That would mark an increase of more than 50% from the bottom end of the range.

Why the dramatic spike? It partly comes down to supply and demand. Covid-19 drove up the price of many goods as lockdowns distorted global supply chains. This weighed on milk production, as farmers dealt with more expensive fertilizer and animal feed as well as new environmental rules. Meanwhile, the appetite for dairy products, especially in developing countries, grew during the recovery.

Then came the invasion of Ukraine, which further scrambled access to products like wheat, fertilizer and fuel, hiking costs for dairy farmers once again.
“The war is the thing that’s causing the major problem at present,” Kite Consulting managing partner John Allen said.

The price of fertilizer

One of the biggest problems is the spiking price of nitrogen-based fertilizers, which are essential to dairy farming.

“If you look at April 2022 compared to April 2021, you see fertilizer prices almost four times where they were before,” Robert Craig, who runs three dairy farms in northern England with about 1,500 cows.

If farmers cut back on how much fertilizer they use, they can’t grow enough grass to feed their cows while they graze. A recent lack of rain in England is making the problem even worse.

Jessica Langton, who helps run a family farm in Derbyshire with 100 cattle, is concerned.

“We get the majority of our income from milk, so we need to be producing a large amount of grass to feed [cows] through the summer and the winter,” she said. Milk from her family’s farm is used to make cheddar cheese.

Langton noted that a lot of other farms also rely on fertilizer to grow wheat, maize and barley to feed their cows. If they can’t produce enough, they could be forced to sell some of the herd, either to slaughter or to other dairy farmers.

Fertilizer prices were increasing before the invasion of Ukraine because of a spike in natural gas prices last year. Nitrogen-based fertilizers like urea and ammonium nitrate are produced from natural gas.

The invasion of Ukraine made matters worse. Russia and its ally Belarus are major exporters of fertilizer, but few buyers want to touch their supply now. An estimated 18% of the UK’s urea comes from Russia and 7% of its ammonium nitrate, according to Independent Commodity Intelligence Services.

“Russia is such a big exporter of fertilizer, and they have so many sanctions,” said ICIS analyst Deepika Thapliyal. “That’s going to keep supply very tight.”

The price of fuel and animal feed

Energy prices aren’t just a factor in fertilizer production. Fuel is also essential to running a farm, where tractors and other machines can run for between 16 and 20 hours a day.

Langton estimates that the cost of the diesel her family uses has more than doubled compared to last year.

The price of animal feed for cows, which supplements their diets, has surged, too. The UK’s National Farmers’ Union estimates that feed prices have climbed by 70% over the past two years.

Before the war, Russia and Ukraine accounted for more than a quarter of global wheat exports. But the disruption caused by Russia’s blockades at Ukrainian ports sent prices to an all-time high in March. They’ve since come down slightly but remain extremely elevated, rising again in recent days as India banned exports.

Wheat, along with maize and soy, serves as a benchmark for feed prices, Allen of Kite Consulting said.

Craig, the farmer, said that Ukraine produces the “vast majority” of feed for organic dairy cows in the United Kingdom. Now, that product is practically inaccessible.

How it shakes out

It’s not a given that grocery stores will hike milk and other dairy prices in line with dramatic forecasts. Stores are wary of raising the price of essential items too much, lest they scare away customers.

“Some retailers will be prepared to take a much lower margin, if not potentially small losses, [to] make [sure] people come through the door,” said Tom Holder, a spokesperson for the British Retail Consortium. “No one wants to go to the supermarket that has the high-priced milk.”

But farmers like Langton and Craig worry that the dynamics hurting their businesses aren’t going away. Many have to contend with rising labor and transportation costs, too.

“There’s literally nobody to employ. You advertise jobs and there’s very little response,” said Craig. Two of his farms produce milk for cheese. Milk from the third farm is dried and used in a cappuccino mix made by Nestlé (NSRGY).

Kite Consulting estimates that total costs of production for dairy farmers will rise by 29% from 2021 to early 2023. Government subsidies, meanwhile, are dropping, making it even harder to break even.

“If we don’t see the milk price increasing alongside hyperinflation, we could see a lot of dairy farms exiting the industry across the UK,” Langton said, referring to the price at which her family can sell its milk to processors.

Rising food costs will hit poorer households the hardest. About a quarter of Britons have already skipped meals in response to the cost-of-living crisis, according to a survey published by Ipsos this week. That number rises to one in three for people with lower incomes.

David Beasley, head of the United Nations World Food Programme, has warned that rising food prices will cause social unrest in some parts of the world.

As prices are pushed higher to help farmers stay in business, demand is expected to begin to fall off, allowing the market to rebalance itself. But when that moment will arrive remains an anxiety-inducing unknown.

“I don’t think it’s too expensive yet,” Kite Consulting’s Allen said.

“New Zealand farmers will be happy with this result,” said NZX dairy analyst Alex Winning.

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