Soaring production costs could put pressure on the US food industry


The food industry has many growth drivers but also constraints. As a non-cyclical industry, there is a constant demand for food products, which helps drive some growth in the industry. However, profit margins in food production and processing are shrinking and facing some pressure due to the highly competitive nature of this industry. Companies are facing increased commodity price volatility, disease outbreaks and weather events, which may well affect profitability and growth.

While the U.S. food and beverage industry has fared well against global industry performance during the pandemic, and insolvencies have been lower than expected, due to soaring costs of food production in the United States, companies are seeing tighter margins even as higher prices are passed on to consumers. US food and beverage production is expected to grow another 1% in 2022, much less growth than seen in recent years, however.

The recent wave of the Omicron variant felt around the world could affect plans for a smooth trajectory in 2022. Many companies, especially those in the hospitality and catering sub-sectors, are still struggling to absorb the shocks of the onset of the pandemic, according to a recent food industry trends report from Atradius. The absence of tourism and travel during the height of the pandemic and new variants of COVID-19 are causing a slow rebound in economic recovery in this sub-sector.

The United States is currently experiencing the highest food price inflation since 2008 and food prices are expected to continue to rise in 2022, at least until supply chain issues are resolved. As government subsidies disappear, the pressures will mount for the American consumer.

Subsectors

– Beverages: A more positive prognosis this year, with solid growth and sufficient liquidity. Beverages has seen a lot of innovation and product development, which has contributed to its positive performance.

– Meat and Dairy: Remains neutral as higher operating and production costs remain high and impact profit margins.

-Food services: this sector will be the slowest to rebound from the effects of the pandemic and is much more susceptible to future variants of Covid-19.

Trends for 2022

Food will always be a necessity and consumers enjoy cooking at home, as well as dining out. Demand will always be high in the food industry, but it is also very competitive. Healthy and innovative products are essential for food companies and restaurants to remain competitive in this landscape.

During the pandemic, food delivery has skyrocketed, and this trend will continue in 2022. Options for plant-based and health-focused alternatives continue to increase as consumers demand more choices in this area . Raw material costs and the lack of qualified employees will continue to be a problem for the sector in the coming year.

Credit risk assessment remains fair over the next 12 months (for non-payments and insolvencies). Companies that are able to effectively pass on price increases while maintaining sufficient manpower and production capacity to meet continued demand will find themselves better positioned in the coming months.

Sharon Benfer is Senior Risk Underwriter at Atradius

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