Rising energy costs add fuel to the food industry's fire

UK processors are scrambling to combat mounting energy prices through cost-saving initiatives, as pressure on margins increases.

Brewer Adnams, which was on a fixed price contract until September, was bracing itself for a whopping price hike. "You work 12-14 months in advance when estimating a budget," says head of production Bob Lee. "I budgeted for an 8% increase and I'm expecting to be 50-60% out!"

But the firm planned to deal with rising costs by finding new uses for its by-products. "The waste we have is spent grain and this is used to feed cattle. But I know that work is going on at universities to use this as fuel instead," says Lee. "We also have waste beer and yeast that could be a potential energy source - I believe that could be done with anaerobic digestion and we're in talks with a couple of firms."

Tate & Lyle was also facing tough times: analyst Panmure Gordon had just issued a sell rating on its stock amid fears that rising energy costs could dent profitability. "While US natural gas prices have fallen from their highs, prices are still over 50% higher than the average last year, and we think UK gas and electricity prices are rising faster still," said Panmure.

Potato processor McCain has embarked on a number energy management initiatives such as constructing an anaerobic lagoon at its Peterborough site in an effort to cut energy bills, but was still feeling the pinch. "We've reduced energy consumption from non-renewable sources to minimise cost impact," said corporate affairs director Bill Bartlett. But he admitted: "We're suffering as most sectors are."

And the future is even more dismal than the present, according to one manufacturing giant, which asked not to be named. "We're expecting costs to rise by 50% in the coming year," it said. The firm claimed there were two ways of dealing with the issue: "One is through aggressive management of our cost base, and the other is through price increases with customers."

Steve Barraclough, director of sales at industry analyst Interfax predicted: "Oil currently costs $129 per barrel and it'll rise by at least 10-15% year-on-year." There was no escape overseas, he warned. "Unlike the issues with labour costs, companies can't relocate to cheaper areas because fuel prices are the same everywhere." The only way to ease the burden, he suggested, was for processors to turn to hedging and use any revenue to offset higher oil prices.

Even the Food and Drink Federation struggled to be positive. "It's difficult to see how they'd go back down to last year's prices," said a spokeswoman. "Reasons for the increase include speculation and developing countries demanding more."