• Juanita Schwartzkopf

Industry Sectors 2.5 Years After the Pandemic Lockdowns: Food Processors and Manufacturers


Looking back over the past two and a half years, one industry that has experienced significant change and stress is food processing and manufacturing. This sector has been impacted by all the challenges experienced since March of 2020 - shutdowns, work from home, hybrid work environments, testing requirements, plant restructuring requirements, labor shortages, PPP loans, other government stimulus programs, changing consumer preferences, supply chain issues, ongoing labor issues, and inflation. Additionally, this sector is feeling the impact of commodity price fluctuations.


See also: Industry Sectors 2.5 Years After the Pandemic Lockdowns: Skilled Nursing Facilities (SNFs)


This article will examine price fluctuations, income statement performance concerns, and trends to watch for in the food processing sector.


Price Fluctuations


To provide context for the level of price changes, let’s look at several ingredients needed in the food processing sector. In the graph below the St Louis Fed shows the PPI for flour from the 1980s to 2022, with the base value of 100 in June of 1983. The current prices have reduced from the 304 peak value in May 2022 but remain at levels much higher than the 2010 to 2020 range between 190 and 220.

The PPI for shortening, cooking oil and margarine is shown in the next graph, with 1982 representing a value of 100. This ingredient peaked at 444.5 in May 2022. The price has been above the July 2008 peak of 330.0 since April of 2021.

In addition to the overall inflation in food input costs shows in the St Louis Fed graphs, the commodity prices for inputs are showing tremendous fluctuations. The graph below was prepared by macrotrends.net and represents the cost per bushel of corn from 1960 to today. The significant fluctuations from just over $3.00 per bushel to over $8.00 per bushel show the wide range of costs food processors have been dealing with during the past 30 months.

The next graph was prepared by tradingeconomics.com and shows sunflower oil peaking in March of 2022, with the price now returning to 2021 levels. This graph also underscores the variations in pricing for this widely used ingredient.

These four graphs show the uncertainty of input costs the food processors have been experiencing over the past two and a half years.


Areas to consider when evaluating financial performance of food processors


Gross Margin Issues: Input Costs & Sale Prices


The fluctuations displayed in the graphs for flour, shortening, corn, and sunflower oil underscore the gross margin uncertainty in financial performance for food processors. Companies typically do not have direct correlation between sales prices and key commodity-based input costs.


Contract analysis is one of the most important analytical tools and tracking mechanisms food processors need to establish. Knowing the key terms of contracts, including the ability to increase prices, the ability to pass through costs, and the automatic renewal options are important both for customer contracts and supply contracts.


Customer profitability analysis is key. Evaluating options to renegotiate contracts to ensure the ability to pass through cost increases and decreases is an important evaluation. Companies have adjusted contracts to tie prices to an easily identifiable index, with examples being tying to a CPI or commodity price source for a specific input, tying to the overall CPI or PPI or a subset of those indices, or a specific industry index such as a trucking industry index. This helps ensures margin performance for the processor, and supply for the customer. Companies have agreed to more frequent price adjustments and have agreed to mechanisms for both increases and decreases.


Operating Expenses


Labor expenses are a large portion of the cost structure for most processors. Geographic differences in labor availability impacts different plants and companies in varying ways.


The US Bureau of Labor Statistics compiles occupational employment and wages by industry sector. The most recent data available is for May of 2021. For food processing, hourly wages per person ranged from $11.46 to $20.26, with an hourly mean wage (“mw”) of $16.16. The five states with the highest employment level in food processing workers were California ($17.16 mw), Texas ($15.74 mw), North Carolina ($16.63 mw), Tennessee ($16.37 mw), and Georgia ($13.22 mw). The top paying states for food processing are Montana ($19.48 mw), North Dakota ($19.27 mw), Illinois ($19.09 mw), New Mexico ($18.52 mw), and Washington ($18.29 mw).


Inflationary pressures in food processing are being experienced throughout the income statement. For example, the August PPI and CPI reported year over year price changes in several important utility and transportation / warehousing categories noted below.


Inflationary Pressures


August 2022 PPI for Energy: 25.9%

August 2022 CPI for Electricity: 15.8%

August 2022 CPI for Natural Gas: 33.0%

August 2022 PPI for Transportation and Warehousing: 17.8%


While companies have already experienced inflation in many of the costs on the income statement, this trend should be expected to continue given that costs are continuing to increase, and the fall and winter heating season will further impact energy costs.


Trends to Watch For


Industry experts have identified these trends as ones to watch for in the food processing sector.

  • Shifting consumer behavior in terms of what they eat, and where they eat.

  • Commodity prices changes impacting sales and cost of goods sold.

  • Automation changes.

  • Inflation.

  • Labor issues.

  • Supply chain.

In addition to the price fluctuations already discussed, let’s consider the first trend noted above – shifting consumer behavior.


Consumers responded to the pandemic shutdowns and remote work with changes to where they ate and what they ate. This caused food processors to need to respond with changes to packaging and delivery mechanisms. With remote work and return to work, trends are changing again.


The increased cost of food is also changing consumer habits. The August CPI for inflation in food costs was 11.4%, with the CPI for food at home being 13.5% and the CPI for food away from home being 8.0%. One change in consumer habits in response to these inflationary pressures is that consumers are moving to lower cost alternatives to the traditional brand names, as happened during the inflationary period in the 1970s. During the 1970s the trend toward store brands took hold and flourished. Recent grocery trends are showing a return to store brands as consumers respond to continuing inflation.


Processors have tried to maintain per package pricing by reducing package sizes – shrinkflation. For example, the number of tissues in a box of Kleenex has dropped from 65 to 60 and Chobani Flips yogurt individual package sizing has been reduced from 5.3 ounces to 4.5 ounces.


Labor issues mean processors are looking for ways to reduce the amount of labor required and the cost per unit of the labor. More automation is being considered by nearly all food processors, and the wait time for equipment is being extended. Return on investment analysis is key to these decisions. Companies are consolidating to lower cost geographic regions if possible, and considering the tradeoff between manufacturing labor costs and shipping costs.


Supply chain concerns have caused food processors to hold more raw material inventory and packaging inventory to ensure manufacturing lines are not idled due to lack of materials. Transportation issues have caused food processors to hold more raw material and finished goods inventory levels to ensure manufacturing lines are able to operate and that customer orders can be fulfilled. These changes impact working capital investment and line of credit structures.


What should lenders consider?


Financial performance analysis is key to success in this environment. Analytical tools addressing customer profitability, customer contract review, supplier contract review, hedging opportunities, labor cost analysis, and energy costs are critical to success. If a processor is preparing a robust analysis and responding to the findings in the analysis, they have a higher probability of success.


Weekly cash flow reporting, including a weekly BBC reporting, is key to cash management and understanding impacts on working capital and the line of credit structure. A weekly cash flow is always an important financial management tool, but with the price fluctuations and increased working capital needs this cash flow tool should be used by every company, to improve the likelihood of success.


Contract summaries should be requested – contracts with customers and contracts with vendors.


If hedging is used, hedging strategies and the hedging position could be reported monthly.


Strategic planning related to locations, labor availability and mix, and automation should be periodically requested and updated.


A financial forecast through 2023 which allows sensitivity analysis and performance risk review for changing commodity prices is an important management tool.



The Future


Food processors have been whipsawed in multiple directions during the pandemic – consumer preferences and behavior changes began impacting financial performance on day 1 of the pandemic. As consumers were returning to work, inflation began to further impact consumer purchasing dynamics.


Analysis is key to developing alternative approaches to managing financial performance. The processors that are focused on working capital management and profitability analytics increase their likelihood of success.