Food businesses find answers to pressure from global events

Matt Greer is Food and Agribusiness Industry Manager at Truist.  He combines more than 20 years of financial experience with the power of Truist's Business Lifecycle Advisory approach to help food companies anticipate challenges and seize opportunities at each stage of the business's lifecycle.

Macro forces are changing the economic landscape and leaving agribusinesses with few clear signs of what’s to come. For food companies, the path through the turbulence means staying on top of industry development, planning carefully, and making strategic investments in productivity improvements.

Global forces create uncertainty.

The war between Russia and Ukraine—two major commodity producers—has created a ripple effect throughout the global economy. With sharply rising natural gas costs pushing the cost of fertilizer higher, skyrocketing input costs and shortages have led to frustration and protests by farmers all over Europe.

The U.N. has tentative agreements in place for Russia to export more ammonia—so critical to most fertilizer manufacturing—using a pipeline that runs through Ukraine. If the plan moves forward, it could moderate fertilizer prices and ease supply limitations. But frequent infrastructure attacks have left Ukraine without the functioning power grid that’s essential for the pipeline’s operation.

As China wrestles with an immense wave of COVID cases, it’s hoarding food and fertilizer to build up domestic reserves. As the virus makes its way through China’s cities and provinces, restarting logistics and resyncing the supply chain will likely lead to the same type of disruptions there that we’ve seen in the U.S. over the past two years.

When China returns to full mobility and economic activity, we should see a rise in production and exports along with an increase in domestic demand for oil, which could put more pressure on global energy prices and trigger another cycle of inflation and economic volatility that will affect agribusinesses worldwide.

On the plus side, China is the U.S.’s largest export market by dollar,^{Disclosure 1} and while the precise impact of a recovering China is tough to predict, as long as geopolitics don’t interfere, food producers should see opportunities for export growth of products from soybeans and corn to cotton and beef.

In our hemisphere, a trade dispute with Mexico—the largest importer of U.S. corn with a 27% share of U.S. corn exports^{Disclosure 2}—that erupted over genetically modified (GMO) corn looks to be headed toward resolution, at least for now. Mexico initially announced a ban on the importation of all GMO corn starting in 2024, but as the negotiations progressed, it relaxed restrictions on yellow corn used for animal feed and industrial uses—the majority of U.S. exports—while holding firm on the ban of GMO corn for human consumption. We’ve not heard the last on this issue—neither party seems satisfied with the current solution and the ultimate answer will have implications for seed, fertilizer, herbicide, and field selection along with an effect on demand and prices for corn in both countries. .

The U.S. agribusiness picture looks relatively bright.

The outlook for U.S. producers is brighter than in much of the world. Given our access to natural gas and Canadian potash, we don’t face the same fertilizer issues as Europe. And thankfully, no war is being fought on our continent.

High inflation rates in the U.S. are still being buffeted by disruptions in the supply chain and labor markets. Prices for raw materials including seed, fertilizer, pesticides, and herbicides—agribusiness necessities—have escalated, and labor remains scarce and expensive—skilled labor even more so. 

While the U.S. can keep agricultural production high, a strong U.S. dollar combined with elevated prices for grain squeezes agricultural exports. Rising costs, weather variability, and high interest rates mean that U.S. producers have little visibility into margins in the year ahead.

Until now, the answer has been price increases as food companies at every point in the production chain have raised prices to offset the margin challenges they face. In an inflationary environment, consumers, restaurants, and food retailers have been absorbing the increased cost of production through higher prices. But as the U.S. economy begins to cool in response to the Federal Reserve’s interventions, the ability to pass these costs along to consumers is disappearing.

If producers can’t raise their prices to maintain margins, they’ll need to turn to reinvestment in their businesses to find the efficiencies they need to protect profits. Although equipment financing costs may be modestly higher, prudent investment that can boost labor productivity, reduce the need to hire new workers, cut energy costs, or improve quality and food safety can have a substantial impact on a business’s performance in today’s environment. 

Regulatory concerns will shape the future for producers.

Food safety is a top priority in the U.S., and regulators aim to keep it that way. Outbreaks of foodborne illnesses and the recent baby formula shortage have raised concerns as to whether the Food and Drug Administration (FDA) is always up to the task.

Expect the regulatory environment for food producers to change in several ways in the near future. First, the FDA is creating a food safety and nutrition division—separate from its pharmaceutical and medical oversight duties. Second, the rollout of Section 204(d) of the Food Safety Modernization Act (FSMA), also known as the Traceability Rule, will pick up speed this year. 

Food producers can expect greater attention from an FDA division that’s concentrated on our industry. Further, the Traceability Rule will require producers to build additional capabilities to gather extra data as food moves through the supply chain. These regulatory requirements will push many food producers to restructure their risk management functions, boost traceability and quality data collection, and add data analytical skills. Producers can expect increased compliance costs along with a step-up in quality management capabilities to meet regulatory needs. 

Investing for a competitive edge

At every stage of the business cycle, forward-looking companies are investing to help battle margin compression, labor shortages, and increasing data and reporting demands to provide a sustainable boost in profitability.  While you can’t often predict global events, you can use strategic investment to create additional returns and operational leverage to endure what comes next.

An investment in newer, more automated food production equipment can ease pressures in numerous ways:

• Reduce the need for skilled labor, along with the associated costs and hiring headaches.
  
• Enhance compliance through better and easier data capture and tracking.
• Add production capacity with greater scalability to secure national contracts or meet future demand.
• Improve quality control, product consistency, and waste ratios with advanced sensors.
• Lower energy usage to reduce overhead costs and benefit the environment.
• Shrink your real estate needs through efficient use of space with a smaller mechanical footprint.
• Control maintenance costs by retiring older equipment.
• Minimize risk of loss through food spoilage, quality, and safety issues resulting from equipment failure.

Beyond automation, producers are responding to consumer preferences by investing in cold storage capacity for healthy, ready-to-eat meals—both fresh and frozen. Others are pursuing a transition to organic products and traceability of the food supply to follow consumer trends. 

A closer look at operations, facilities, and processes can not only reveal ways to improve efficiency and reduce waste, but it can also uncover safety risks that need to be addressed to avoid costly regulatory noncompliance and safety violations.

Look to the future as you weigh your options.

A “heads-up” mindset is vital in these times of economic and global volatility in agribusiness. That often means not letting short-term margin pressures and elevated financing costs cloud your long-term view for your business and inadvertently shortchange its future.

Despite today’s pressures, the long-term outlook for the U.S. food business is upbeat as signs point to our industry having an even stronger position as the world’s food production refuge. With global delays in manufacturing and shipping, getting in line now for equipment upgrades and capacity investments could give you access to labor and cost saving rewards sooner while positioning your business for long-term success.