The commodities connection: how sustainability could be the answer to the energy and raw materials crisis
Stroud Brewery, nestled in the bottom of one of the five valleys that mark out Stroud as an old industrial town, is an interesting place to start my journey to understanding the impacts of world energy prices on the UK’s food and drink industry.
An organic brewery with a bar and café, Stroud Brewery was founded by Greg Pilley in 2006 to bring locally brewed beers to market, whilst innovating and having environmental considerations.
Most of the barley malt they purchase is grown in the Cotswolds, “but despite buying locally, we have seen our malt prices rise as they are linked to international markets and shortages and the impact of the war in Ukraine will certainly have influenced this”, says Greg. This struck me as the complete parallel to the energy market, having been asked numerous times why local renewable electricity supply prices go up if it’s the fossil fuel prices that are increasing.
“Locally grown malt costs reflect the international prices even though they may not be subject to the same costs,” Greg tells me. Energy is not dissimilar, world energy prices – fossil or not – came crashing down in early 2020, triggered by a drop in demand of around 10% during the first COVID-19 lockdown, across Europe and beyond. However, as a result of building demand coming out of the pandemic, followed by the conflict in Ukraine, international energy prices have dramatically risen to levels almost never previously seen in these markets, resulting in a worldwide crisis and impact on cost of living.
This has meant that all energy prices have increased, whether produced by renewables, nuclear, coal or gas, because essentially energy, like malt, is an internationally traded commodity.
How energy prices are set
“Energy prices have been at record highs throughout 2022 and this looks set to continue,” says Dan Monzani, Managing Director UK & Ireland at Aurora Energy Research. “Russian gas supplies to continental Europe have drastically reduced, raising competition and prices for other global supplies. Although spot prices have temporarily softened [in November 2022], it will be 4-5 years before Europe has built the necessary infrastructure to replace Russian gas fully, so [for the time being] the cost of business energy will remain high by historical standards.”
The recent Government announcement about support for businesses provides some help with increasing UK wholesale energy costs, but it is limited to bills covering the period between 1 October 2022 and 31 March 2023. The Energy Bill Relief Scheme works by limiting what energy suppliers pay for wholesale energy bought in the UK to 21.1p per unit of electricity, and 7.5p per unit of gas. The savings made by suppliers must then be passed on to their business customers. Other energy costs such as supplier margins and network costs are still added on top.
But understanding how energy affects the cost of food is more complex than just looking at bills. I spoke to Ben Read, Operations Director at artisanal condiments maker Tracklements. Energy – which the company needs for cooling, heating, processing and storage – is around 5-6% of their total input cost of production. Tracklements‘ energy bills almost doubled in February 2022, as Russia invaded Ukraine. Their mitigating factor was that as part of their early environmental investments in their facility, they had installed solar panels on their roof, accounting for around 20% of their total power consumption. “This is looking like money well spent,” says Ben. “Our efforts to become more [energy] efficient and environmental [environmentally conscious] have paid off during this time of huge energy price increases.” As a direct result of this, they are now looking to extend their total solar capacity from 150kW to around 400kW in total, taking them close to 50% electrical self-sufficiency, with the remainder imported from renewables only.
“We’ve also looked at how to reduce energy usage through looking at the cycling of our storage cooling to night-time, essentially being paid for being flexible with our power loads,” adds Ben, “but there are some things that are just out of our control.” Most of Tracklements’ raw materials have gone up in price, in particular packaging. Just in the last couple of months they have seen an increase of over 30% in the cost of glass jars and 45% for metal lids – an important part of the Tracklements’ products. This is driven in the main by the increased energy costs of recycling glass and tinplate, which require high temperatures.
Shipping and ingredient costs
Along with energy prices, ocean freight rates have also gone up. Despite recent drops in demand, costs for freight were 160% higher than pre-pandemic for most of 2022, according to Freightos. However rates have started to drop in Q4 of this year.
The increase in freight costs, plus a bumper harvest in the UK has meant that sourcing British ingredients has never been more necessary – or easier. With wheat stuck in Ukraine, and increased costs for Canadian and German wheat, UK wheat with higher quality and better protein levels has been used more widely. “This year we have sourced 100% of our wheat from the UK,” says Sam Wells, Commercial Director at Hobbs House Bakery, “and although it hasn’t reduced cost significantly, we are proud to be able to do this.”
Hobbs House Bakery have done well during this energy crisis. Not only have they been refurbishing their Chipping Sodbury trading units, keeping them cooler in summer and warmer in winter, but last summer they also took good advice and bought power for as long as they could, meaning they fixed their prices at the lowest part of the market.
“But we are not complacent,” says Wells, “we know our energy prices will eventually go up, and we are preparing as much as possible to ensure that we aren’t wasting energy.”
Hobbs House use standard baking ovens, which are on 24 hours a day, but they also have walk in freezers and ‘flash freezers’, which ensure that their frozen products are the same quality as their fresh when delivering further afield. The bakery is now looking to check all their appliances to make sure that they are operating efficiently.
“Our advisors told us a story about a larger commercial bakery that has two operational compressors, which to the naked eye were operating with exactly the same effectiveness. However, one had a faulty seal and was using thousands of pounds more than the other. Checking your equipment is vital to making sure you are not wasting energy.”
For Hobbs House this included going on a journey to become B-Corp certified, which has made the company look at all the environmental impacts of their business. Just the process of being forced to measure and report has really helped them find new ways to be more efficient. In addition, Hobbs House have really appreciated being part of the B-Corp family and being able to meet and talk to a range of other similar businesses where they can exchange ideas and help each other improve.
Having talked to various people on how the UK grain sector was performing in the international market, I wanted to find out more about how organics were faring versus non-organic as fertiliser prices reached an all-time high earlier this year, with increases of around 350% since 2020. I picked up the phone to Lee Holdstock, Trade and Business Development Manager at the Soil Association, to find out more about how organic farmers were weathering the storm.
“The problem is that this isn’t just a crisis of energy costs, or chemical costs, we are also in a labour crisis, due to the decrease in migrant workers post Brexit,” he tells me. “Organic farmers are still a small percentage of the UK farming make up, producing around 1.8% of all UK food, on about 5% of land area. And although they are making relative savings as they aren’t using fertilisers, the squeeze on labour costs, and the lack of balance in the equation for the increased biodiversity and carbon soil content they provide, is not giving them the advantage you might expect.”
Organic seems to be producing more benefits than standard farming, with lower energy usage, better carbon sequestration and preservation of biodiversity. However, this is not being reflected in the prices organic farmers can offer to consumers because of lack of scale of organic produce on the UK market, no real compensation for other benefits that organic farming brings, and their competition’s lower labour costs.
One organic grower that has always been pioneering in the organic arena is Riverford Organics. Guy Singh Watson started farming organically at Riverford in 1987. Self-confessed veg nerd Guy has grown the organisation from a wheelbarrow delivering homegrown veg to friends to a national box scheme delivering to around 50,000 customers a week. I talked to Zac Goodall, Head of Sustainability, about how Riverford was fairing in the current crisis.
“The driver for Riverford has always been about reducing its environmental impact,” Zac tells me, “around 18 months ago we swapped our polytunnel irrigation from diesel generators to solar powered and now we have had 400kW of solar on our largest packing facility at Wash Farm for 2 years. Both are helping us navigate high energy costs affecting us.”
Riverford have also spent a lot of time tweaking their HGV transport routes in order to become more efficient and reduce costs, as part of their cutting carbon programme, and have developed Beetroute, an in house logistics app to optimise last mile deliveries in vans, which saves fuel, whilst reducing costs. Not forgetting the more mundane work on their IT systems, they have upgraded their server room at HQ to become highly efficient and cut its energy use in half.
These measures obviously support Riverford in reducing the impact of energy costs, but I wanted to hear from someone who has set out to produce nearly all their energy themselves.
I reached out to Richard Clothier, Managing Director of the family-run dairy business Wyke Farm, whose three biogas plants help power their cheese making operation at their Somerset site in Bruton.
Becoming energy efficient
Richard started looking at lean manufacture to make their sites as energy efficient as possible in the early 2000s, reusing water and utilising heat recovery. This prompted them to look at their environmental footprint as well. Wyke Farm generates power from their factory waste, and takes in waste products from local businesses, including apple pomace from cider mills and bread waste from supermarkets.
“We have been insulated to some extent,” says Richard. “Although we produce enough energy in total for the whole business, some goes into the grid wholesale and is transported locally, and then we have to pay retail prices at another site, because the wires are owned by the local distribution company.
“There’s a big difference in the wholesale price of solar and retail price of power, and no real benefits given for producing and supplying locally. Our electric provider provides a balancing function which makes it very costly. With gas, the prices have gone up tenfold, which is good from a generation point of view, as we only use 60% of our gas and have been able to export the rest. But we’ve found it difficult to pass on any increase in cost for our own gas to match the market, and so have lost out on the opportunity costs”
Probably one of the biggest places Wyke has felt the impact of skyrocketing energy prices has been in the costs of inputs like feed and packaging. Everything they buy is produced using energy and there have been price increases and availability issues, just like for Tracklements.
Wyke believes that many businesses want to be more energy independent and have some of the natural assets to produce green energy cheaply, but don’t have the opportunity because the grid networks cannot give them the right access. They want a more intelligent grid, that can figure out how far the power is going, and allows business to better benefit from local supply.
So even if a business is practically energy independent on site, there is still no escape from the increase in energy prices, whether it’s directly through wheat and malt costs, or indirectly through the increase in smelting costs for recycling glass. Energy costs have affected the food industry at every single touch point.
All the companies I have talked to have been looking to reduce, reuse and where possible generate energy. Hopefully if we have a set of policies and guidance in the future, these efforts will be proportionally rewarded, and our food industry can become resilient to world changes and more capable to respond to challenges in the future.