Brexit and growing inflationary pressures create heightened risks for the food and agri sector in 2017.
The food and agri sector could benefit from Brexit. New trade deals could boost exports with non-EU countries while the fall in the value of the pound is already helping exporters.
But Brexit also interacts with many of the major challenges faced by the industry today, including regulation, supply chains and the cost and availability of labour. Heightened risks in these areas were already emerging in 2016 and may well begin to crystallise over the course of this year and next.
Inflationary pressures build
Despite the industry’s efforts to hold back price increases, the spectre of food inflation is expected to return in 2017. Costs for food and agriculture companies are under pressure on a number of fronts, most notably the depreciation of Sterling following the Brexit referendum, but also the prospect of higher energy prices and rising labour costs.
Inflationary pressures in the post Brexit world were exposed last year by the dispute between the large supermarket chains and Unilever, which had sought to raise wholesale prices on branded products like Marmite, PG Tips and Ben & Jerry's ice cream. In January, Premier Foods became the latest manufacturer to raise prices on brands like Mr Kipling Cakes and Oxo stock cubes and it is certainly a trend that looks set to continue.
Emerging labour crisis
Brexit is also entwined with another hot topic for the sector, the growing shortage of labour and skills. Farmers, food manufacturers and restaurants all rely heavily on EU migrant workers – they account for an estimated 30% of the UK food manufacturing labour force.
The National Farmers Union recently warned of an emerging labour crisis for farming after the number of seasonal workers coming to the UK from Europe fell last year. The fall in the pound and Brexit are already discouraging some EU workers, raising concerns for a growing shortage of labour in food and agriculture.
Labour costs are already under pressure in the food and agri sector. With low levels of unemployment and increasing demand, wage inflation appears to be a real prospect – expanding discount supermarkets Aldi and Lidl recently announced they are to increase minimum hourly wages and all employers are having to price in the cost of the increasing living wage.
Leaner supply chains
Increased costs will be difficult to pass on to consumers in todays competitive and politically charged market. As a result, food retailers and manufacturers are increasingly likely to seek efficiency savings, sparking further consolidation and the restructuring of supply chains.
We are already seeing a move towards consolidation among food manufacturers – Bernard Matthews and the Ministry of Cake were both recently sold to larger food groups. There is also a trend for large retailers to use fewer suppliers, a move that has implications for supplier credit risk – S&A Foods failed in 2015 after it lost a large contract with supermarket chain Asda.
Reputational and fraud risk
A renewed drive for efficiency could also bring about a period of heightened risk for the food and agri sector.
There will be concern that a drive for efficiency could hit investments in risk management and loss mitigation. While the drive for efficiency, together with a potential labour shortage, could also accelerate the trend towards greater automation in food manufacturing.
Significantly, consolidation and streamlining could make supply chains more vulnerable to disruption, product recall and fraud, as with the horsemeat scandal. Cost cutting could also result in food safety and quality issues, especially if it is accompanied by a Brexit stimulated relaxation of food safety regulation.
Food product recalls are already running at record levels, while a major food safety incident would be hugely damaging to the UK industry’s reputation.
The focus on cost is also likely to extend to insurance spend.
The double digit decreases in premiums seen in recent years will be much harder to come by in today’s market. Insurers’ margins are already wafer thin and signs are that we are close to the bottom of the market, with little room for reductions.
However, promotion of strong risk management and careful insurer selection can help save on insurance costs, leveraging knowledge of the market via a specialist broker and through more appropriate programme structures.
For further information, please contact Simon Lusher, Food & Agri Practice Leader on +44 20 7459 5550 or email email@example.com