Surviving inflationary & supply chain pressures

At the start of 2022, everyone was breathing a sigh of relief as we started to accept that non-lethal variants of Covid-19 were going to be a part of our lives going forward, just like influenza and how we live with it.

However, by February 2022, everyone was talking about rising food prices and how inflation was at a record high. This was because the agricultural sector had been impacted by the lack of people available for sowing, pruning and harvesting due to the pandemic. As sowing season was not maximised and 2020 & 2021 were two very unpredictable years for weather, the resulting harvests were/are not as plentiful as they could be.

All of these had impacted food prices by Jan/Feb 2022. However, by the end of February, the conflict in Ukraine had started and till date there has been no sign of this abating.

In fact, on Friday 11 March 2022, there were reports of the Russian forces hitting grain silos, ports and the infrastructure needed to gather and distribute the harvest, as well as food storage facilities according to The Toronto Star and The National post.

This is expected to have significant further impact on availability and prices of food and oil prices, which in turn drives up inflation further.

Between Russia & Ukraine, they export c. 25% of the world’s wheat, and c. 70% of the world’s Sunflower oil (46% from Ukraine & 23% from Russia). Ukraine is a leading corn(c. 13% of the world’s corn) and soybean exporter as well. For centuries, Ukraine was considered the breadbasket of Europe. So the conflict has a major impact on food prices. Even before the conflict, prices for sunflower oil were expected to increase and wheat prices had already increased due to the constraints imposed by climate change and the pandemic.

The alternative to the significant current and expected shortfall in Sunflower oil and Wheat supply in 2022 is to source Sunflower oil from the US and wheat from Australia. However, market pressures and increased demand for US Sunflower oil from other countries has resulted in already high prices skyrocketing due to limited stocks available, and Australian wheat farmers are struggling with supply chain bottlenecks and climate change challenges.

This shortfall in food supply is not expected to ease in 2022 as in the Ukraine/Black Sea region, the sowing season for Sunflower oil is April/May for harvesting in September/October, for Wheat harvesting is in August/September and for corn, planting starts in early May and harvesting in September.

Further to these food related bottlenecks, we are also facing rising prices for oil and gas due to sanctions on Russia and complex supply chains due to the conflict. Russia produces nearly 11m barrels of oil a DAY. They are the 3rd largest producer following the US and Saudi Arabia. Russia is the world’s biggest exporter of oil to global markets and the second-largest exporter of crude oil, exporting about 2.85 million barrels per day by sea lanes and pipelines, according to the International Energy Agency. In 2021, 70% of Russia’s oil produced was exported. As a result, oil prices have jumped by more than 30% since 24 February.

What’s more Russia is the largest supplier of Gas to the European market. The combined impact of the two are putting further pressure on already high energy prices and driving inflation up even more.

Due to the price increases expected, consumers should consider buying locally produced grains, beans and oils, and use public transport (or bike/walk) to reduce spend and ease the pressure on the above mentioned foods and oil/gas in 2022.

Fast moving consumer goods companies are caught in between with reduced supply of raw materials and fuel and soaring prices for both. While there are options and alternatives for us as consumers, companies that produce food and beverage brands have fewer options.

For example, Corn is an essential ingredient of Kelloggs corn flakes and they’ll find it difficult to move from using Corn as a major ingredient.

They would also experience increased costs (from increased costs of corn and the energy used for production and logistics), which, if they pass on to consumers, would impact demand and sales in 2022 and, alternatively, if they decide to absorb all or some of the costs, would significantly impact on margins and profit.

While we’ve used the example of The Kellogg Company, all FMCG (CPG) brands will experience this, some worse than others. For example, those that use oil, wheat, soy beans or corn as an (essential) ingredient or in the production process will see significant cost increases and those that do not will still experience cost increases due to energy price increases.

In order to mitigate the revenue impact, FMCG/CPG companies will need to look toward increasing volumes of sales through new products, markets or consumer groups. In order to manage costs they need to look toward reducing the costs of other raw materials that go into their products.

Continuing with my example above, The Kellogg Company could look to reducing the cost of packaging and printing for its corn flakes by looking to cheaper options for its cardboard and printing. While this may not mitigate the increase in the cost of corn, the reduced cost of packaging and printing may help mitigate the increase in corn and energy prices to an extent. Another, more environmentally friendly, option maybe to use this as an opportunity to introduce packaging free product and refillable canisters at stores. This can help The Kellogg Company reduce the cost of packaging significantly while attracting more consumers for its climate friendly practices.

Refillable stations of The Kellogg Company range at ASDA in the UK

While in the short term, they may still experience some cost increases, in the long term, they would be set up to overcome significant economic and supply chain shocks due to a diverse supplier base, to resist competition, and retain or even grow their market share due to their environment friendly practices.