The US and global economies are experiencing the effects of an overheated financial system. Initially considered a transitory concern by financial institutions, sustained and rising inflation has increased the cost of goods and services at rates not seen in decades.
The food and beverage industry’s rate of inflation exceeds that of other elements of the consumer price index. Increases in food, energy, and shelter have been shaking up business operations and putting serious strain on food suppliers, distributors, manufacturers – and, of course, families.
What Drives Food Price Inflation?
Food prices increased for the 11th straight month in June 2022, increasing 9.1%. That level of inflation hasn’t been met by consumers since March 1981 and outpaces the USDA food price inflation forecast for the year, which was set at 7.5%.
Myriad factors have dovetailed to create a perfect storm in the food industry. Every link of the food supply chain has experienced unprecedented pressures, from labor shortages during harvests and at the processing plant to supermarkets not having enough staff to stock the shelves.
Some of the most acute food and beverage supply chain challenges have been:
- Lack of harvest help – The US and other countries have struggled to employ enough workers during crop harvests and throughout the year. In some cases, this has left entire crops rotting in the fields. Labor shortages in the agricultural industry contribute to food price inflation in two ways. First, to attract adequate labor, the industry has increased wages, the cost of which is passed on to the consumer. Second, reduced yields driven by the labor shortage increase the price of those food products; and those increased costs are then passed along to the rest of the supply chain.
- Weather shocks – Volatile weather patterns have also reduced food production in many parts of the world. Rising temperatures, shifting rainfall patterns and sustained droughts are immediate factors driving food ingredient prices higher and will contribute to long-term challenges, too. By 2030, climate change could reduce corn production by as much as 24%. Similar agricultural shortages have led to record-breaking price increases in various food ingredient sectors, notably specialty hydrocolloids.
- Overstretched food transportation and logistics – Border closures and air freight restrictions have made getting food ingredients to manufacturers more expensive, less reliable and much slower. As different countries experienced rising COVID-19 cases and changed health guidelines, food production’s global footprint came under renewed scrutiny. Producers and manufacturers were left scrambling for an international distribution partner with on-the-ground warehousing capabilities in the most valuable markets.
- Manufacturing and processing from COVID-19 Closures – Food processors in the US and around the globe have been deeply affected by COVID-19 for more than two years. Shorter-term challenges include temporary closures to reduce the risk of exposure to the virus as well as social distancing measures, which reduced on-site staff and lowered production. In the long term, these challenges have resulted in the complete shutdown of facilities that suffered financially due to changes in demand, staffing shortages or the rising costs of doing business. Those closures add pressure to processing facilities working to meet consumer demand.
- Market volatility – Widespread closures in the opening months of the pandemic put unprecedented strain on restaurants and other consumer-facing marketplaces. Manufacturers without a secondary or tertiary market for their products faced sustained revenue losses and substantial product losses on perishable goods. Those who failed to adapt have largely shuttered operations. This fluctuation has added additional pressure on manufacturers attempting to serve traditional and expanded markets, such as new ecommerce retail channels.
How Have Food Ingredient Prices Impacted Inflation?
One of the most influential price increases isn’t a food ingredient itself but has ratcheted up the price of everything from wheat to eggs to rice. Oil prices impact the price of both energy and fertilizers, both of which are used extensively in crop production. Total energy prices have increased 9% in 2022, while fertilizer prices have jumped 3%. Energy prices impact the transportation and processing stages of the food supply chain as well.
Petroleum-based chemicals, lubricants, and specialty ingredient prices have increased at similar rates to oil itself, which has fluctuated at or above $100 a barrel since Russia’s February invasion of Ukraine, a conflict that has disrupted both energy prices and the distribution of wheat around the world.
Of course, petroleum is also critical to food packaging; the price of plastic per pound (PP) will be $0.15 higher in 2022 compared to the year previous.
Specific food ingredient prices for pasta, bakery goods, and other cereal-based products have been the most affected by these factors. Pasta, for example, has seen a 140% increase in ingredients prices, the biggest increase of any food index. Bakery ingredient prices, which already increased 13% in 2021, have now hit a 67% YoY increase.
Four Food Supply Chain Solutions to Solve Long-term Problems
It’s an economic truism that high prices fix high prices. There’s already evidence that more farmers are planting wheat to take advantage of high prices, which should lower as supply increases at the next harvest. Demand destruction may also reduce the rate of inflation in the energy sector, which will eventually contribute to lower food prices.
In any case, food industry businesses can take four meaningful steps to secure their supply chains and help collectively to bring down inflation:
- Improving supply chain management – Working with an established distributor and supply chain management partner offers immediate and long-term advantages. Our global storage capabilities allow manufacturers to keep strategic stocks of vital ingredients and to access more suppliers than ever while outsourcing the associated licensing and paperwork.
- Expanding product development – Manufacturers rely on creative solutions to provide stop-gap options or long-term alternatives to ingredients that become difficult or cost-prohibitive to source. Tilley Distribution’s research and development capabilities serve as an extension of our partners’ product development efforts, allowing creative solutions to be found faster.
- Marketplace versatility – Expanding go-to-market channels reduces exposure to unexpected changes in consumer habits. In addition to pivoting to ecommerce and B2C products, we’ve helped develop and support expansive private labeling services to introduce food products in new markets and strengthen a company’s presence on store shelves.
- Reducing upstream food waste – Reducing food waste in the supply chain can make companies more profitable, individual markets more sustainable and consumer products more affordable. 30-40% of the US food supply is wasted and while 31% of the loss is at the consumer end of the chain, a larger share of 40% occurs upstream.
Improve Your Food and Beverage Business with Tilley
With an international presence and a range of value-added services, Tilley is uniquely positioned to meet your food and beverage ingredient needs in the current challenging environment. Learn more about our capabilities and let’s talk about your current and future headwinds. Contact a Tilley representative today.
