The 2024 economic outlook paints a mixed picture. Constrained growth across the leading economies, stubbornly high inflation, and a slowness to ease the tightened monetary policy cycle means industries are facing challenging operating environments. The food industry is no different and its relationship with these macro-economic factors is complex.
For many years, the developed world has generally had a stable supply of cheap high-quality food. Recently, the status quo has been challenged. Brexit, war, labour shortages, supply chain disruption, regulation and climate change mean that the complex interlinkage will continue, but it will be more volatile than stable.
Brian MacSweeney of our Agribusiness team examines some of the key macro-economic trends and the impact they are having.
Labour availability and cost
The current global labour trend is marked by shortages and increased costs. This has a ripple effect, slowing food production and distribution, and ultimately increasing the price of food.
An example is the recent minimum wage increase in California for fast food workers. This was an important step towards better living standards for workers, but the corollary is higher food prices. Fast food prices across chains in California are increasing. At a time of higher inflation this disproportionately affects cohorts from socially disadvantaged backgrounds which is a key trend globally in the industry.
Commodity prices and inflation
The FAO Food Price Index (FFPI) for June 2024 stood at 120.6 points in June. To put this into perspective, the FFPI averaged 125.7 points in 2021, which was a 28.1% increase over 2020. Therefore, the current FFPI of 120.6 points is lower than the average for 2021, but it is still relatively high compared to historical standards.
This is driven by various macro-economic factors. In addition, climate is having more of an effect on prices. The poor cocoa harvest in in Ghana and Ivory Coast has caused Cocoa prices to spike and coffee has experienced a similar fate with futures of coffee spiking due to heatwaves affecting major producers in South-East Asia. While we await general inflation to subside due to continuing government interest rate intervention, events like climate keep food prices elevated.
Policy & regulation
Europe leads the way when it comes to regulation of food where labelling, nitrate levels, flavour use, unfair trade practices all have been legislated for over the last number of years. The introduction of the Corporate Sustainability Reporting Directive (CSRD) across the EU is having a transformative effect.
While regulation means well, it can impact food yield and cost. In terms of price, not every government is explicitly regulating food prices, but because the cost of food is one of the clear ways the population sees inflation impacting their wallets, governments are intervening because they want the price of food kept flat or even reduced.
Recently in Canada, the Prime Minister summoned CEOs of the five largest retailers and gave them a deadline to reduce the price of food, warning they would be subject to heavier regulation if they didn’t comply. Similar conversations are happening in various jurisdictions around the world, putting real pressure on the margins and cashflow.
Geo-politics
Geopolitical instability and particularly war has a profound impact on consumers and producers alike. The impact of Brexit on food availability in the UK and the impact of the war in Ukraine on grain prices is well documented.
The simple diversion of shipping from the Strait of Hormuz to around the Horn of Africa adds days to supply chains and cost increases for consumers. These events are becoming more frequent making outlooks more unpredictable.
Disruption & technological advancement
The pace of technological advancement is a significant challenge but also an enormous opportunity. Recent disruption started with e-commerce and delivery. Now, the use of Artificial intelligence (“AI”), precision agriculture, biotechnology and blockchain has the potential to unlock enormous efficiencies across the entire sector.
AI and weight supressing medications are key emerging disruptors. AI can significantly impact the value chain right from crop yield monitoring to customer experience.
Weight loss drugs, such as Wegovy and Ozempic are not widely available, but the pipeline of new alternatives including orally ingested drugs may alter consumer eating habits and food preferences, leading to a decrease in the consumption of high-calorie snacks and fast food.
This disruption is a prominent agenda item for the boards considering their product offerings and strategies.
Optimism & opportunity
Despite the challenging macro environment, we are beginning to see an easing of inflationary pressures due to the tight monetary policies pursued by central banks around the world. As inflation calms, monetary policy and interest rates will fall. This will drive a renewed consumer demand which will stimulate economic growth.
The food industry is well versed in managing economic cycles and has always been resilient and adaptable. It has consistently demonstrated its ability to evolve through challenges and changes over the years. During this period, there is huge opportunity for the Irish food industry.
Already, Ireland is leading the way in sustainability. The acquisition profile of our companies is strategic and niche, for example in sectors like food preservation. The integration between food and energy companies is becoming more pronounced, with solar farms emerging alongside food plants and ongoing trials for bio-methane production – this is to solve the emissions problem.
Moreover, our universities are spearheading cutting-edge research and fostering strong industry collaborations. While the landscape presents its challenges, it also offers great opportunities. As always, the future holds promise and potential for those ready to adapt.
How KPMG can help
KPMG's Agribusiness team can help you improve the efficiency and profitability of your business through our wide range of audit, tax and advisory services. Our national and international cross functional agribusiness professionals focus on understanding the issues faced by agribusiness companies and developing tailored solutions to meet these challenges.
We combine our multi-disciplinary approach with deep, practical industry knowledge to help clients meet challenges and respond to opportunities.
Get in touch
If you are looking for guidance in Agribusiness, we can help. As a first step, please contact Brian MacSweeney of our Agribusiness team. We'd be delighted to hear from you.
Brian MacSweeney
Partner
KPMG in Ireland
