The Food and Beverage Industry Amid Inflation and Volatility

You’d have to have been living under a rock not to have noticed the devastating effect global inflation and volatility is having on food prices – a fact which clearly impacts, not just customers buying food for their own sustenance, but also food and beverage businesses purchasing products and ingredients for their own operations.

"In the United States, grocery prices are commonly measured using the Food at Home Consumer Price Index (CPI),” writes New Food Magazine. "This CPI has increased by an average of 2.1 percent each year since 2000, but it rose by 11.9 percent from May 2021 to May 2022. Increasing by an average of 1.3 percent each month during the first five months of 2022, this is the highest five-month average increase since April-August of 1973.”

The COVID-19 crisis clearly has a lot to answer for here as it drove up the labor and transport costs, economic uncertainty, and increased food loss levels, but the pandemic is not the entire picture. The Russian invasion of Ukraine has also driven up the price of staples such as wheat, cereals, bakery products, and oils.

Climate Change

Another factor which is affecting the price of many food products is the climate crisis. The incidence of severe weather events has been steadily climbing since the 1990s and these events have also had a significant impact on the food supply chain.

"Droughts and hurricanes in the US and floods in China and Australia are recent examples of weather conditions that have reduced food supply and increased food prices and uncertainty,” continues New Food Magazine. "Pests and diseases are also factors. For example, citrus greening – one of the most serious citrus plant diseases worldwide – has reduced orange production considerably in the US.”

However, research from Morgan Stanley suggests food prices reached their peak in 2022 and will begin to drop as we move further through 2023. This drop will mainly be felt by companies which benefit from lower food-input costs, such as retailers, restaurants and packaged-food companies. Morgan Stanley gives two reasons for this prediction:

• Farming margins have been high for several years, buoyed by high grain prices, which have offset hikes in fertilizer costs. This has allowed crop investments and acreage expansion; both should help supply. Margins are still solid, and even above historical average, and we believe farmers will continue to invest in crops, leading to inventory increases over the next year.
• Without offering a prediction on the timing of conflict’s end, Morgan Stanley expects an increase in supply resulting from easing tensions that would moderate Ukraine’s drop in grain production and damage to infrastructure, combined with no major disruptions to the fertilizer supply chain.

However, with these predictions being far from guaranteed, the food and beverage business needs to be prepared for a long period of inflation and volatility and invest in areas which will offer the greatest resilience against future crises.

Disaster-Proof Food

Whilst the food and beverage business cannot directly invest in the practices which would best prevent these kinds of shortages and price-hikes in the future, they can ensure these methods become profitable by voting with their wallets and showing a need for them.

Vertical farming and other indoor farming methods mean vast quantities of food can be produced in a controlled and weather resistant environment meaning there is far less chance of external factors impacting yield. Moreover, vertical farming in particular can produce multiple fields worth of food while only taking up the footprint of one. However, vertical farming is highly energy intensive which means it requires a sympathetic investment in renewable energy solutions to make it viable.

Not only will investment in these areas help facilitate these more effective farming practices, but will also mean the food and beverage business is far less susceptible to volatility in the fuel and crude oil market. Less food will need to be transported over large distances as we can grow larger crops of more climate sensitive products domestically.

Automation is also answering the problems of reduced labor in the food production industry. Countries such as the UK have seen the number of farm workers plummet as a direct result of leaving the EU – many farm workers and crop pickers were made up of EU migrants taking advantage of the freedom of movement allowed by membership of the organization.

"The successful implementation of these solutions will take time, money and public-private coordination and collaboration,” concludes New Food Magazine. "There will be bumps on the road and food prices will likely remain higher than normal through at least 2023, given our current situation. But we have a roadmap to creating a food supply chain that is resistant to the greatest threats it currently faces, and for the most part the technology required to make it a reality is already here. There is reason for optimism looking forward.”

Final Thoughts

The challenges of the current environment of inflation and volatility are likely to continue to one degree or another for the foreseeable future and the food and beverage industry needs to respond to make sure resilience is increased to weather this and future crises. Investment in key areas such as modern farming practices and automation can help with this.

The effect of inflation and volatility of the industry is sure to be part of the conversation at Digital Food and Beverage 2023, being held in June at the Hilton La Jolla Torrey Pines, CA.

Download the agenda today for more information and insights.