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The Next Hit to U.K. Food Makers Is Surging CO2 Costs

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(Bloomberg) --

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The government-brokered solution to a carbon dioxide shortage that’s roiled the U.K. food industry comes at a cost -- prices for the gas will rise sharply, adding to a raft of pressures already squeezing the sector.

Soft-drink makers are worried it could take two weeks before a deal to restart a fertilizer plant, where CO2 is made as a byproduct, alleviates the market. Companies are being quoted prices ten times higher than normal for imported loads, an industry group said. And the British Retail Consortium called for a longer-term fix to ensure the gas that’s relied on to process animals and give soda its fizz stays plentiful and affordable.

The price surge is the latest hurdle for producers that are already grappling with labor shortages and a lack of truck drivers needed to ferry their goods to supermarkets and restaurants. An index of U.K. food prices in August rose to a one-year high, and a global gauge is near its loftiest in a decade as poor harvests and expensive freight adds to the pressure.

“We’ve been talking about the possibility of food inflation for quite a while now, and I think we’ll see that basically come to pass,” Richard Griffiths, chief executive of the British Poultry Council, said by telephone. “CO2 has hit the headlines quite rightly, but it is still just one of many challenges and many rising costs in the industry.”

Officials on Tuesday agreed to give “limited financial support” to help CF Industries Holdings Inc. restart a fertilizer plant halted by high gas prices. That will cost “many millions” of pounds and could leave food and beverage makers paying fivefold more for CO2, Environment Secretary George Eustice told Sky News.

The gas is usually a minimal part of poultry and soft-drink production expenses, but adds to burgeoning bills across the board. The government’s deal spans three weeks, giving the market time to adapt to higher global prices, it said.

C02 is used to stun pigs and chickens for slaughter, as well as in packaging to extend the shelf life of food and for the “dry ice” that keeps items frozen during delivery. Fertilizer output at CF Industries’ two sites that it halted last week provide as much as 60% of Britain’s production of the gas.

“We need the market to adjust,” Eustice said. “The food industry knows that there’s going to be a sharp rise in the cost of carbon dioxide, probably going from 200 pounds ($273) a ton, eventually closer to 1,000 pounds.”

Industry group British Meat Processors Association called the deal “a huge relief” and likely to avert a 25% cut in pork production that was expected Friday. Longer-term higher prices for CO2 won’t be sustainable for all users, but might tempt more industries that produce the gas as a byproduct to capture and sell it, the group said.

That’s already the case for companies like beer-maker Heineken NV, which has invested 5 million pounds in the past three years so that it can recover CO2 from facilities in Hereford and Manchester to avert shortages. Its current supplies remain unaffected, according to a U.K. spokesperson.

“Hopefully this will kick-start supply immediately and the impact on food availability for customers will be minimal,” said Richard Walker, managing director of frozen food retailer Iceland. “But what happens the next time gas prices spike?”

(Updates with comment from soft-drink, retail groups in second paragraph.)

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