2016 predictions part five: Food deflation set to continue

21 December 2015
2016 predictions part five: Food deflation set to continue

In the final part of our predictions series, PSL managing director Daniel Wilson (pictured) says that food deflation is likely to continue into 2016

2016 is shaping up to be a difficult year to predict. Currently, PSL is forecasting food deflation of up to 1% for the first six months of 2016. The two prime factors we are closely monitoring are weather and the global political situation.

El Niño has been officially declared for 2015/16, and historically this has resulted in more extreme weather. Potential results are reduced crop yields and quality, as well as delayed rains in key growing regions.

Russia has disrupted many global supply and demand markets since implementing the ban on EU produce in 2014. In 2014, Europe exported €8.3b of food to Russia and this was down 24.6% on 2013 and will have dropped further in 2015, causing surpluses across all commodities.

The European dairy sector has been hard hit with UK/EU farm gate prices forced down and there is concern whether milk production is economically viable over the longer term. Over the past couple of months we have seen an increase in dairy cattle slaughtering, which we believe is artificially keeping a lid on beef pricing.

A similar situation is occurring with EU pork, with prices being driven below the cost to produce. This has caused a range of government intervention packages in an effort to protect the future of these industries.

An additional factor that must be considered is the new National Living Wage. Whether this additional cost will flow through to food pricing is as yet undetermined.

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