Notwithstanding the increased movement by consumers and grocers alike to “buy local,” the food chain is becoming progressively more globalized for most countries around the world. This globalization has created a range of opportunities and risks.
On the positive side, U.S. companies are aggressively eyeing new markets with millions of potential consumers. Conversely, a far reaching and more complex supply chain is prone to risks brought about by regulatory and non-tariff barriers, disruptions due to natural disaster, political upheaval and economic instability, rising oil prices and its effect on food production and transportation, and the dynamic and unrelenting variations in consumer demands and desires.
Painting the big picture
In their recent sector report, Food Industry: still solid but price volatility will bear watching, global credit-insurer Coface outlines some of the larger trends that are impacting food supply chains.
Naturally, food prices are a reflection of various inputs, starting with raw materials. In June 2010, raw material prices headed higher again, after easing from their previous spike in 2007/2008. Grain, sugar, meat, diary, soybeans, and cocoa are some of the commodities that have experienced significant price hikes, particularly in emerging economies.
As for 2012, it’s likely that food prices in the U.S. will settle into their more historic trajectory, which means price increases in the neighborhood of two and a half to three and a half percent, says Kenneth Moyle, senior vice president, Coface North America.
However, there are some wild cards in the current mix that could upset this forecast, he cautions. “Energy prices and natural disasters are the biggest ones,” while grain prices, too, could start to fluctuate sharply due to changes in the tax code.
Specifically, tax incentives targeting ethanol in the EU, and biodiesel in the U.S., could alter global grain production—a classic example of the integrated relationship between tax codes, energy prices, and agriculture production.
Indeed, Moyle cites another example of the integrated nature of food supply chains, one of which became apparent during the global recession. “A lot of the large seafood producers were financed by Icelandic banks, and when Iceland had their crisis, they had trouble borrowing. Some producers either had to stall production or cut back, although now most of them have access to capital again for their production facilities,” he says.
In a further illustration of how risk can unleash a ripple effect throughout a global supply chain, Moyle notes: “Of all the commodities in world trade, food becomes the most political. That’s because you have farm subsidies in many countries, you have arguments over genetically modified foods, and so on. And, a lot of the revolutions that started last year were started over food shortages. Dictators stay in power when everyone’s being fed, but people take to the streets when they get hungry.”
In an interview with PBS NewsHour last September, Rami Zurayk, an agronomy professor at the American University of Beirut explained, “I think that the prices of food mobilized people,” he said, referring to the political uprising in the Middle East and North Africa.
“If you look at Tunisia, for example, you see that the Tunisian uprising started in the rural area,” where many small farmers live and are just looking for a means to support themselves and their families, he said. It was a young, college educated, but unemployed Tunisian named Mohamed Bouazizi who was selling fruit and vegetables in the street without a license and that set himself on fire after he was confronted by authorities, which many consider the genesis of the Arab Spring.
Trade policy and non-tariff barriers
Trade policy, both in the U.S. and abroad, is another key component of the global food supply chain. The seemingly capricious imposition of non-tariff trade barriers, such as antidumping and countervailing duties, quotas, certain regulatory requirements, and sanitary and phytosanitary measures, amount to one more area that’s prone to fluctuation when it comes to imports and exports of food and beverages throughout the world.