- Juanita Schwartzkopf
Will Food Prices Continue to Increase, & What Does that Mean for the Food and Agribusiness Sector?
Updated: May 18, 2022
The food and agribusiness sector of the economy is experiencing serious increases in prices based on the data from the April 2022 CPI and PPI.
The April CPI indicates that while the overall index was 8.3%, food was 9.4% with food at home reporting a 10.8% year over year increase and food away from home reporting a 7.2% increase.
The April 2022 PPI reported an overall increase of 11.0% with food increasing 16.3%.
Also of note, while the overall indices were flat or dropped slightly from March to April, the food categories increased month over month.
What else is contributing to these inflationary pressures?
First let’s consider wheat. The list of the 10 largest wheat producing countries includes Ukraine at number 8. Clearly farmers in the Ukraine are more concerned about war with Russia than growing crops.
Top 10 Wheat Producing Countries (in tons of wheat produced 2020)*
China — 134,254,710
India — 107,590,000
Russia — 85,896,326
United States — 49,690,680
Canada — 35,183,000
France — 30,144,110
Pakistan — 25,247,511
Ukraine — 24,912,350
Germany — 22,172,100
Turkey — 20,500,000
India recently announced that it will not be exporting wheat during this crop year. That has resulted in wheat price spikes. While the May 12, 2022 wheat close was $1,178.75, that price has increased to $1,247.50 as of May 16, 2022 – for a 6% increase in the two trading days since India announced its new export policy.
The example of wheat prices shows the disruption in food supplies and prices caused by the Russia/Ukraine war as well as the impact of import/export decisions made by trading partners. This form of price disruption should be expected to continue into the foreseeable future, and businesses that rely on commodity inputs to produce their products and services will continue to be stressed.
Food at home versus food away from home?
The April CPI showed food away from home increased 7.2% compared to a 10.8% increase for food at home. This means consumers are not able to shift from eating out to eating at home to save money in their budgets. According to government tracking the following increases have occurred in food categories from April 2021 to April 2022.
Flour and prepared flour mixes 14.2%
Butter and margarine 14.0%
Meat, poultry, and fish 13.8%
Fresh fruits 10.1%
Fresh vegetables 5.9%
These cost increases will also occur at the processor level and continue to drive up prices at least for a while.
Food away from home should be expected to increase in cost as restaurants reprice menus. To date research has shown that grocers have been more aggressive with price increases than restaurants, but that should be expected to change.
Processors and consumers are also dealing with changing package sizes or product sizes to keep the stated price the same year over year, while the input costs have changed. That type of change further complicates the packaging for products with supplies and production and processing lines needing to be adjusted. Invoicing also needs to be adjusted, which may involve vendor systems as well as internal systems. As businesses work to deal with prices in one area, problems surface in other areas. Management is challenged every step of the way from raw materials to collection of invoices.
The Food Producers and Processors
Financial performance stress is continuing in the agribusiness and food processing sector. For example, while eggs have increased 11.2% in price to consumers, the cost of corn has increased 22% from May 2021 to May 2022.
Labor availability and cost issues continue. In March of 2022 for every open position, there was 0.5 persons available to fill the position. Labor costs are increasing as employers compete for the limited pool of employees, which can be exacerbated based on required skill sets or geographic location.
Supply chain stresses also are continuing. While the Asia to West Coast North America freight index had decreased from its high of $20,586 in September of 2021, it remains above $15,000. Some experts are expecting a short-term improvement in cost and availability of shipping resources, but those same experts expect additional stress in future months.
What can borrowers and lenders do?
The structure of asset based lending programs will be impacted by higher levels of inventory at higher costs, higher receivables levels, and higher payables. It is going to be critical that borrowers and lenders forecast working capital needs through the remainder of 2022. Once issues are identified the borrowers and lenders will need to work together to solve for the cash needed.
Fixed charge coverage ratios and EBITDA performance has been impacted by all these factors also, with businesses and their lenders struggling to determine achievable performance levels that continue to result in required debt service coverage. Monthly forecasts need to be updated and covenant performance must be recast to guard against crisis situations.
These are challenging times, and it doesn’t look like they are getting any easier. Analysis and planning are key in 2022.