Summer 2009

Fundamental change

Food businesses expecting a return to business as usual once the economy has returned to positive growth are likely to be disappointed. There are increasing signs that the recession has bottomed out and that during 2010 growth will trending back towards its long term average rate of growth. But in our view food businesses will not be able to look back to the past in order to forecast the future.

A recurring theme of late has been the developing adverse balance between global supply and demand for agricultural products. Grain prices underpin the global food system and other arable crops such as oilseeds and soybeans – of particular importance for animal feed prices – are rising. In contrast the global downturn has resulted in faltering demands for dairy products causing prices to weaken but again they remain some 40 per cent above their 2007 levels.

Different environment for food companies

Over the last quarter of the 20th century UK food companies enjoyed a steady downward trend in the real prices of their raw materials. But that downward trend has now been reversed – see Figure 1 – and in future for many agricultural products the assurance of plentiful supplies has been replaced with greater uncertainty resulting in supply chain risk simultaneously rising and shifting upstream to the interface between raw material suppliers and first hand processors.

Strategic outlook

The upward shift in agricultural prices reflects the continuing growth of demand from the world’s developing economies and the emerging constraints on supply. In contrast across the world agricultural productivity is facing increasing challenges. Fertilizer prices remain at historically high levels, energy prices having fallen from their peak last year are starting to rise again while water shortages and climate change are particularly worrying features of the coming years. Put bluntly global agriculture has reached a ‘tipping point’ and life will never be the same again for food processors and manufacturers.

Figure 3: Decoupling points
Figure 4: Relationship map
Figure 5: Using the map
Figure 6: Relationship matrix

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