Food price inflation reached a record high in 2018, following harsh weather across Europe. As businesses look to soften the inflationary pressures, Miguel Campos, export sales manager at food packaging supplier Advanta, gives his advice on overcoming the issues fluctuating costs bring.
The food industry relies on the supply of competitively priced raw materials. However, the unpredictability of ingredient costs can cause immense challenges. NASDAQ has tracked the global cost of grains, meats and soft commodities such as orange juice, sugar and coffee, for the last 10 years. The reports produced by NASDAQ show relentless peaks and troughs in prices, but without any real pattern or predictability.
For food manufacturers, these fluctuating raw materials prices can account for up to 80 percent of direct materials costs. As a result, this pricing volatility can cause immense challenges for financial forecasting. But, what’s causing the price volatility? Broadly speaking, raw materials prices are affected by three factors: global supply and demand, local supply and demand and currency fluctuations.
How Can The Industry Manage Price Volatility?
Unlike some other industry sectors, food manufacturers cannot rely heavily on building inventory when costs are low, due to the perishable nature of food products. In this challenging environment, food manufacturers are being forced to reassess their processes for selecting and sourcing their ingredients.
It All Starts With Farmers
Securing the long-term sustainability of the industry inherently means taking care of the long-term economic, environmental and social sustainability of farming. Building stronger ties between the food industry and farmers is important to mutually protect both from market uncertainty and price volatility.
There are heaps of examples of this already taking place. For example, McCain currently collaborates with 1,700 potato growers, from whom it purchases its potatoes — this gives growers the opportunity to invest in their farm, to prepare fields more effectively and maximize crop quality and output. Additionally, 80 percent of McCain’s volume is contracted, which gives security to both the farmer and McCain while ensuring that the potatoes varieties match consumers’ demand.
Kellogg’s is embarking on a similar project. The Kellogg’s Origins Program helps farmers focus on climate smart agriculture to improve crop performance. The program also provides farmers with expertise in agronomy, market access, research and financing. Again, this is a reciprocal alliance that helps both the manufacturer and farmer overcome issues associated with price volatility.
The Areas You Can Control
It is not always feasible to work closely with farmers in the ways some of the big players in food manufacturing have, however, there are areas in production that all food companies have control over.
Businesses should choose suppliers in other areas that can guarantee supply. Think packaging, machinery and maintenance, to name just a few. For example, if your packaging supplier isn’t meeting demand, it may be time to look elsewhere. With trusted and predictable suppliers in the chain, brings more stability to take on the unavoidable price volatility.
Another method is to implement lean manufacturing methodologies, maximizing the use of their raw materials and cutting waste wherever possible. Any offcuts or rejects in food manufacturing operations should be reassessed to see if they could be used elsewhere. Taking a more considered approach to ingredients usage can only help the bottom line of a business, even in times of price unpredictability.
While assuring sustainable profit margins will continue to be a concern for food businesses, there are actions that can be taken now to help alleviate the volatility of ever-fluctuating raw material prices.
