Russia's invasion of Ukraine has accelerated the unprecedented situation of (food) supply chain shortages as well as extreme prices for gas and energy. Ukraine is known for being Europe’s granary: the country accounts for 12% of global wheat exports, 16% of corn exports and 16% of barley exports. Moreover, 33% of all sunflower oil used in the European Union comes from Ukraine. The current unparalleled circumstances are good reason for agri food companies to be highly alert. A-INSIGHTS put together 4 steps to help you weather the storm.
Pressure on the food supply chain is increasing
The economic sanctions imposed by the European Union on Russia will further increase the pressure on the food supply chain. On top of that, central banks looking to end their stimulus programs, interest rates are likely to rise in the coming years.
This will not only increase the cost of capital but will also further increase the cost of labour. High prices for crucial building materials (e.g. steel, which is trading 40% higher than a year ago on the London Metal Exchange) will be in the system for the entire earn-back period of capital expenditures.
Moreover, the rise in energy prices has been accompanied by a surge in fertilizer prices. According to Bloomberg, fertilizer prices have increased by 500% in the past year. Combined with structural staff shortages and poor harvests, the current market situation poses an unprecedented challenge to companies in the food industry.
Supply chain shortages 2022: here to stay?
There are clear indications that current shortages – gas, electricity, transport and labour – and related cost inflation will not disappear from the scene for the foreseeable future. These exceptional circumstances are a good reason for agri-food companies to be highly alert and prepare for what’s to come.
Cost price inflation: 4 steps to weather the storm
It is up to the management of agri-food companies to offer direction. To provide certainty when there is so much uncertainty. This is a big challenge, and many executives struggle with the same issues.
Proven ways to prepare for a situation of this magnitude is to be cost-competitive by tightening the belt in your operations and to limit exposure between procurement and sales by reducing the level of speculation.
To help you do so, A-INSIGHTS drafted 4 steps that will help your business weather a storm like this. The four steps are:
- Improve the alignment between procurement and sales strategies to reduce risk
- Account for price variability in your operating model
- Prepare a strategy on cost reductions and organize them in waves
- Bring everything together a robust, flexible multi-year financial forecast
Want to know how to execute these four steps?
Download our Industry Insights Report on the Cost Price Inflations in 2022 and read how you can prepare your business for what’s to come. With these steps, you will be well prepared and be able to create support and understanding in the organization, as well as the alignment you need to execute effectively.