Are Big Food Companies in Harm’s Way?
Severe Weather is top of mind these days. In the ag sector, severe weather has played a role in supply depletion of highly sought after commodities. Unusually dry weather was a contributing factor in cocoa prices reaching all time highs and impacting the chocolate industry. Above average temperatures in Spain and the Mediterranean along with decreased rainfall have been damaging to olive oil production. In Italy and India, extreme fluctuations in weather have led to too much and too little rain for rice growing. Drought in the United States amounted to 106 million fewer bushels of soybeans last year. And, potato fields in Europe have gone unharvested due to flooded fields.
Weather is certainly impacting trade on a global scale, but are food companies and household brands at risk of closing their doors due to ingredient sourcing issues and cost increases on commodities? The trickle down effect might be less disastrous than you think. Sure, there is not as much cocoa available for purchase, but as we just saw during Halloween, Hershey’s managed to put millions of bags of candy on shelves. What does this tell us about supply chain dynamics?
Mitigating Risk
Food companies, for the most part, are factoring severe weather into calculations and have multiple ways of managing risks when it comes to sourcing their ingredients.
One way they are safeguarding against shortages is to diversify suppliers. Rather than rely on one region to source all of their ingredients from, some of your favorite restaurant chains and labels are expanding their supply networks to build regionally strong relationships with farmers and ranchers. If tomato crops are coming in from multiple locations there are fewer hiccups if one location suffers due to weather related problems. Sourcing from small plots all over makes for fewer pricing fluctuations and ultimately a more predictable balance sheet. Chipotle, a brand consumers rely on for fresh ingredients, has used this technique to mitigate risk and stay true to their values.
Another risk management tool used by food companies is to diversify their offers. Investing in new companies that sell unique products. These investments can protect existing supplies and build new momentum for food companies. We saw this with Halloween candy. Chocolate companies invested in marketing products that used less chocolate while simultaneously pushing new novelty, virtually non-chocolate items.
In a worst case scenario food companies can opt to discontinue a specific line or single product if the cost of its ingredients becomes too high. But, a normal baseline for commodity pricing is broader these days due to severe weather and food companies appear to be accommodating the volatility. They are building trust with consumers in how they navigate supply chain disruptions due to severe weather.
The Wall Street Journal reported that 64% of consumers are worried about severe weather in relation to climate change and 74% of consumers think weather will grow into a larger issue in coming years. Along with these concerns, consumers expect big food companies to play a role in addressing potential impacts of climate change. In fact, a growing number of consumers change their own purchasing habits in favor of brands that align with their values around how components and ingredients are sourced.
It takes huge price changes before food companies feel that level of impact. Of 300 surveyed food companies, 90% said increased food prices have changed the way they do business and roughly 75% are actively working to build supply networks or help implement more resilient farming methods. Will weather changes cause Ag prices to jump too high and put food companies out of business? Probably not. At the individual company level the food acres are small enough that fluctuations in price can be absorbed.
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