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Industry interdependency: A domino effect

Published on October 20, 2021

A recent hike in the wholesale price of gas has caused chaos across the energy industry, not only impacting the wider energy market and domestic utility prices, but also seemingly unrelated industries such as food and drink. How is it that a 390% rise in the wholesale price of gas since January 2021, with the price peaking at 294p per therm in early October, can cause potentially crippling issues for an industry such as food production?

The rising price of wholesale gas has become a growing problem. A large increase in prices between August and October this year forced 12 energy companies out of business, causing confusion as their combined almost 2 million customers were moved to different providers, often at a higher tariff. The high prices have also impacted industries that buy natural gas as a raw material to produce other goods. Fertiliser production has been hit especially hard: a fourfold increase in the price of raw materials made it unviable for the UK’s major producers to process the chemicals. As a result, production was halted, leading to a further loss of associated by-products, including one in particular that is vital in food production, processing and packaging.

Carbon dioxide (CO2) is a waste gas from chemical processes such as those used in the production of fertilisers, and on the surface, a reduction in its output would be a positive outcome of a cessation in this kind of industry. However, it has implications for other areas of production. Through the manufacturing of chemicals such as fertilisers, waste gases are captured and processed as a by-product that is needed by other industries. Stopping these chemical processes in turn put a stop to the production of CO2. For example, the UK’s biggest producer of fertilisers (US-owned CF Industries) was forced to temporarily shut two UK sites that produce 60% of the country’s commercial carbon dioxide supplies because of a sharp rise in gas prices.

But why does a drop in the production of CO2 matter to the food industry?

We depend on CO2 to provide us with fresh food as it is used in the vacuuming process to prolong the shelf life of key produce. It is a vital resource for an industry that needs to supply food that is still fresh when it reaches the shelves and subsequently, consumers’ fridges. Used in the packaging of a range of foodstuffs, from bagged salads to meat products, to inhibit bacterial growth, a loss of CO2 in the food supply chain would result in the absence of many foods we consume daily. Extending the shelf life of fresh food products by as much as five days is particularly important from the perspective of preventing waste and ensuring the availability of produce in stores 24/7.

CO2 has another vital role in the food supply chain: it is used in the processing of pork and chicken to stun the livestock before slaughter. A loss of the gas for this purpose would prevent the processing of livestock at abattoirs, thus keeping it on farms at an increasing cost to the farmer. A warning from the British Meat Processors Association in September, following forecasts that only a two week supply of CO2 was available, raised serious questions about the need to imminently consider the emergency culling of pigs on farms, meaning that the animals could then not enter the food chain. The fact that this was even suggested emphasises the unprecedented significance that such a decline in CO2 resources can have.

The interdependency of these two industries highlights the fragility of our supply chain network. Our food industry relies on the supply of CO2 to provide us with staple foods, but it is highly dependent on other industries to do this. This latest example highlights some of the challenges for supply-chain resilience, particularly around who absorbs the cost of unforeseen volatility in the system. Should energy consumers pay the full market prices for energy as opposed to the energy companies shouldering the burden? If the cost of CO2 increases for food processing, should this be reflected in the price of the end product or do retailers take on this extra cost? What we do know is that in terms of resilience, our current energy and food production systems have weaknesses that are affecting our food security and the continuity of supply.

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RSK Marketing Communications

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