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Agrifood

Inflation affecting the entire production chain

Last update – November 2022

Sector rating 


MEDIUM RISK FOR ENTERPRISES
Fragmentation

Internationalization
Business environment risk
Capital Intensity

Political risk
Profitability
Commercial risk

Strengths & weaknesses

  • High pricing power for farmers and companies in the upstream segment
  • Growth potential: Strategic sector considering the vital role of feeding an exponentially growing global population
  • Steady consumption and immune to inflation as food will always be an essential good
  • Vulnerable to climate change: More frequent and severe floods and droughts affect crops and livestock
  • Food-processing and packaged-food companies continue to struggle with limited pricing power, as well as the surge in energy and transportation costs
  • Persistent labor shortages (throughout the entire production chain), especially across Western Europe

Sector overview

What to watch ?

 

  • The geopolitics of food security: The war in Ukraine has affected food availability as before the Russian invasion, Ukraine supplied 4.5mn tons of agricultural produce through its ports (12% of the world’s wheat, 15% of globally traded corn and 50% of the planet’s sunflower oil).
  • As the world’s population hits 8bn in 2022, ensuring access to food is key to avoid a global food crisis in the coming years, especially as shortages of grains and fertilizers, alongside climate change and lingering pandemic-driven supply-chain issues, have pushed up global food prices by +56% compared to end-2019.
  • Climate change: Changes in temperature, humidity and rainfall patterns, as well as the frequency of extreme weather events (storms, droughts, wildfires), are already affecting farming practices, crop production and the nutritional quality of food crops.
  • Energy crisis: The end of the conflict in Ukraine (when and how) is uncertain, therefore we do not know when Russia will again supply Europe with natural gas, which is not positive for the economic panorama of the region. While it is true that Europe seeks to be self-sufficient in energy, this will take time. As a result, we expect the price of fertilizers will remain relatively high in the short term, keeping general prices of agrifood high as well (vs. 2020 prices). Nevertheless, we think prices may have peaked in Q3 2022 and that 2023 could be a pivot year.
  • Veganism: Much of the world is trending toward plant-based eating and this global shift could be here to stay, representing a considerable decrease in consumption of animal meats and other kind of animal-derived products (eggs and dairy).
  • Online distribution: Through apps and websites, virtual grocery shopping has become more attractive, especially for young people. This trend will continue to gain momentum and we believe that it will become a challenge for large physical retailers.

The domino effect of the invasion of Ukraine: Russia is the world's largest supplier of natural gas and is responsible for 33% of the world’s fertilizer production, being a key producer of ammonia and NPK (nitrogen, phosphorus, and potash). As a result, the trade sanctions imposed on Russia have tightened the supply of fertilizers globally. In parallel, other key fertilizer-producing countries, such as Germany, have been forced to reduce production due to high energy costs (as a consequence of the cut in natural gas previously supplied by Russia). The aftermath of all this has been an unprecedented increase in the price of fertilizers, highly used by farmers. As companies in the upstream sub-sector have huge pricing power, they have been allowed to sell their crops at higher prices (and even to strengthen their profits), which is why prices for food commodities have risen sharply throughout 2022 (especially for grains, of which Russia and Ukraine were major exporters as well).

The agri-commodities price increases are being and will continue to be passed on throughout the entire production chain until they reach the final consumer, who will have to pay much more for any product. However, margins growth will differ by sub-sector as the level of pricing power is uneven within each link of the chain, depending on market positioning, product-mix and the geographical footprint of each company.

Generally speaking, companies in the downstream segment are the ones that will face a greater challenge ahead. On the one hand, packaged-food firms keep on struggling with still-high energy and transportation costs that retailing outlets obstinately refuse to take as their charge. Only big packaged-food players with a strong market positioning in the food & beverage industry have been able to use their brand power and large distribution scale to pass on price increases to consumers, while seeing little pushback in demand. On the other hand, food distribution stores are seeing changes in consumption patterns as people are favoring cheaper products (regardless of quality), which further increases the already high price-competition between retailers at the same time that online distribution channels are gaining popularity among final consumers. The only way to keep the customer base in periods of lower purchasing power is through discounts and promotions, which results in deteriorated margins and even in losses for some players.

Subsectors

1.    Upstream: Companies who are engaged in the first phase of the production line, notably in the fields sowing and harvesting all kinds of grains and raising animals (cattle, pigs, sheep, goats, poultry and fish). The upstream stage doesn’t involve any processing of food. The major producers of agri-commodities are China, the US, India, Brazil, Argentina, Canada and Russia.


2.    Downstream: In this sub-sector, companies are involved in processing and transforming the extracted agri-raw-materials into consumable products. The full chain includes processing, packaging, transporting and cooking the food. China and the US are the biggest contributors to the global food & beverages industry, making 31.5% and 17.9% of the world’s total output, respectively.


3.    Beverages (also part of the downstream segment): Companies that produce and supply any type of beverage. The beverage industry contains two main categories: non-alcoholic beverages (such as juice, sodas, soft drinks, coffee, tea and bottled water) and alcoholic beverages (beers, wines, and distilled beverages - also known as spirits).


4.    Food retail: Food retail stores are the retailers or wholesaling retail chains that generally stock groceries, fruits & vegetables, uncooked meat products, frozen products and daily needs such as spices, snacks, sweets and others on the minimum operating margin. Based on the distribution channel, this sub-sector can be further segmented into physical stores (such as supermarkets, hypermarkets, warehouse stores) and online food stores.

Contact 

Maria Latorre
Allianz Trade
+33 1 84 11 50 50
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