As the global economy faces constrained growth, high inflation, and regulatory pressures, the food industry must adapt to rising costs, technological disruptions, and geopolitical volatility, says Brian MacSweeney

The 2024 economic outlook paints a mixed picture. Constrained growth across the leading economies, stubbornly high inflation, and slowness to ease the tightened monetary policy cycle mean 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.

Here are some of the global micro-trends and the impact they are having on the food and beverage sector.

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. To put this into perspective, the FFPI averaged 125.7 points in 2021, which was a 28.1 percent increase over 2020. Therefore, the current FFPI is lower than the average for 2021, but it is still relatively high compared to historical standards.

This is driven by various macroeconomic factors including climate.

The poor cocoa harvest in Ghana and Ivory Coast has caused cocoa prices to spike. Coffee, too, 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 and regulation

Europe leads the way when it comes to the regulation of food where labelling, nitrate levels, flavour use, and unfair trade practices all have been legislated over the last number of years. The introduction of the Corporate Sustainability Reporting Directive (CSRD) in 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, the Canadian Prime Minister summoned CEOs of Canada’s 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 cash flow. 

Geo-politics

Geopolitical instability, particularly war, has a profound impact on consumers and producers alike. For example, the impact of Brexit on food availability in the UK and the effect of the war in Ukraine on grain prices are well documented.

The simple diversion of shipping from the Strait of Hormuz because of Houthi attacks that disrupt vital shipping routes to around the Horn of Africa has added days to supply chains and cost increases for consumers.

These events are becoming more frequent making outlooks more unpredictable. 

Disruption and technological advancement

The pace of technological advancement is a significant challenge but also an enormous opportunity.

AI and weight suppressing 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 in Ireland, 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 and 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 in sectors like food preservation, for example.

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. 

Brian MacSweeney is a Audit Partner at KPMG