Focus - Rising cost of fruit puts pressure on juice prices

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The shortfall in production and rising cost of fruit is causing anxiety among producers of fruit juices. Higher retail prices threaten to stem the strong growth of this dynamic category, and given that rising fruit juice consumption is making a positive contribution to the '5-a-day' campaign, soft drinks companies are urging the UK government to reduce VAT on fruit juice. Annette Farr reports.

Rising costs are a problem common to all consumer goods manufacturers at the moment, and fruit juice producers are no exception. In particular, fruit drinks and smoothie producers are facing a global shortage of fruit which is pushing up prices.

There are few places in the world not experiencing a shortfall in indigenous fruit production. From Kidapawan in the Philippines, where continuous rains have damaged thousands of hectares of fruit-bearing trees, through to the cherry orchards of North America and the banana plantations of South America, harvests are down.

In the US, across the five states of the northwest cherry-growing region, an unusually cold spring has led to a poor cherry crop, leaving some growers with little or no fruit to harvest. The region is expected to ship about 8m 20lb boxes this year, a little over half last year's total.

The price of bananas, the staple ingredient in most smoothies, rose by 36% last month compared to the same period last year, according to US-based banana shipper Chiquita. The company says it expects prices to continue to rise throughout the rest of the year, driven by mounting fuel and fertiliser costs and adverse weather conditions in Central America.

A variety of weather-related problems has also severely affected the world's supply of lemons, with shortages of around 30% expected this year, according to Givaudan, a global flavourings company. This, in turn, is significantly driving up lemon oil prices, which have increased fivefold since 2004, putting a particular strain on the beverage industry, one of the largest consumers of lemon oil globally.

The combination of poor weather and mounting energy costs has presented the fruit juice producer with a double whammy: an increase in the price of raw materials and the cost of production. It seems inevitable that retail prices will rise. These are already premium-priced products, so will consumers be able to afford even higher prices for pure and natural juices, especially with other consumer prices also escalating? Inflation in the UK has risen well above targets. In the latest inflation statistics for June, fresh fruit saw a price index rise of 6.1% month-on-month.

Currently the fruit juice category is one of the most innovative and successful in the soft drinks sector. More exotic flavours are offered, superfruits with their high antioxidant content are sought after, and smoothies have experienced explosive growth, fostered by public health campaigns urging people to consume more fruit and vegetables: 125ml of fruit juice offers one of the '5-a-day'.

The UK government might say the rise in fruit prices is beyond its control, but soft drinks producers point out that there is one measure that is very definitely within its power, and if implemented would make a welcome difference to prices: reducing VAT on fruit juice drinks. Fruit juice carries VAT at 17.5% and is the only contributor to the 5-a-day programme afflicted in this way.

Innocent first highlighted the iniquity of this situation two years ago. At the time, co-founder Richard Reed wrote: "If you look at the numbers, the case seems pretty straightforward. By removing VAT on smoothies and pure juices, the Government could increase sales by some 15%. Of course, we'd benefit as a business, but it would also lead to a massive increase in fruit consumption which is what the Government wants."

The UK government cannot remove VAT altogether without EU approval, as rules do not allow the adding of more products to zero-rating unless it is done across the EU, but the Treasury can reduce VAT to 5% without European ratification.

The British Soft Drink Association (BSDA) campaigned before this year's Budget to reduce the level of VAT to 5%, working with Innocent and major retailers to ensure that, if successful, the price reduction on all juices and smoothies would be passed directly on to consumers. The BSDA argued that reducing VAT would increase fruit juice consumption, and thereby help the Government achieve its 5-a-day targets. Now with fruit juice producers facing mounting costs, the BSDA is urging the Government to revisit the issue.

According to Liz Bastone of the BSDA: "Reducing the level of VAT could have significantly increased the amount of fruit consumed. Current figures indicate that it could increase consumption by 1bn portions a year."

She adds: "This month we have seen the Government amend its tax plans in light of rising fuel prices. Let's hope they realise the impact of rising raw material prices on our sector, and the role fruit juice can play in a healthy, balanced diet and reconsider our proposals."

So far, fruit juice producers have held back from raising retail prices but how long they will be able to continue to do so is uncertain to say the least. While the Government tends to take the position that global market conditions are beyond its control, the industry clearly believes that in this instance it can actually do something to mitigate the effect of external factors on soft drinks producers, while also helping its own public health campaign.

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