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Agrifood Sector Risk Report

Easing prices to continue but climate change could put crop yields at risk

M

Medium RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

Strengths & Weaknesses

Strenghts
  • Steady and growing market thanks to growing population
  • High pricing power for most companies and producers
  • Diverse market with growing demand for alternative products (proteins, plant-based etc.)
Weaknesses
  • Vulnerable to climate change: More frequent and severe floods and droughts affect crops and livestock
  • Food-processing and packaged-food companies continue to struggle with high energy, transportation and input costs.
  • Labor shortages, especially in the upstream segment and in Western Europe
  • Global inflation has exacerbated price competition
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What to watch ? 

  • Food security: The invasion of Ukraine has affected the global food supply and prices. Before the war, Ukraine supplied 4.5mn tons of agricultural produce through its ports (12% of the world’s wheat, 15% of globally traded corn and 50% of sunflower oil).
  • Overpopulation: As the world’s population hits 8.05bn people in 2023, ensuring access to food is key to avoid a global food crisis in the coming years, especially as shortages of grains and fertilizers, alongside climate change and lingering post-pandemic-driven supply-chain issues, have pushed up global food prices by +56% compared to end-2019.
  • Climate change: Changes in temperature, humidity and rainfall patterns, as well as the frequency of extreme weather events (storms, droughts, wildfires) and the “El Nino” phenomenon in 2023 are affecting farming practices and output capacity.
  • Energy crisis: The end of the conflict in Ukraine (when and how) is uncertain. While Europe is aiming to be self-sufficient in energy, this will take time. Therefore, we expect the price of fertilizers to remain relatively high in the short term, keeping general prices of agrifood high as well (vs. 2019-2020 levels). Nevertheless, we think prices peaked in 2022 and that 2023 could be a pivot year.
  • Veganism: Much of the world is trending toward plant-based eating and this global shift could be here to stay, representing a considerable decrease in consumption of animal meats and other kinds of animal-derived products (eggs and dairy).
  • Online distribution: Through apps and websites, virtual grocery shopping has become more attractive, especially for young consumers. This trend will continue to gain momentum, becoming a challenge for physical retailers.
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Russia is the world's largest supplier of natural gas and is responsible for 33% of the world’s fertilizer production, being a key producer of ammonia and NPK. As a result, the trade sanctions imposed on Russia have tightened the supply of fertilizers globally, while in parallel other key fertilizer-producing countries, such as Germany, have been forced to limit production due to high energy costs. The result was an unprecedented increase in the price of fertilizers, which represent around 12% of input costs of field crop farms. Fortunately, so far in 2023, fertilizers have become more affordable following the drop in natural gas prices. We believe the peak is behind us, which could diminish agrifood prices slightly.

Profit growth has been differing by sub-sector as the level of pricing power is uneven within each link of the chain, depending on market positioning, product-mix and the geographical footprint of each company. Companies in the upstream sub-sector do have strong pricing power so they have been allowed to sell crops at higher prices and even to strengthen their margins throughout 2022 and the first half of 2023. Yet, part of these price increases are also due agrifood scarcity since farmers in some regions have faced tough and unexpected weather conditions that led to reduced yield projections and quality for several agricultural commodities. On the other hand, companies in the downstream segment are facing another challenge as stubborn inflation and low consumer confidence reduce their ability to continue raising prices to boost profit growth. Only big packaged-food players with a strong market positioning in the food & beverage industry have been able to use their brand power and large distribution scale to pass on price increases to consumers, while seeing little pushback in demand. On the other hand, food distribution stores are seeing changes in consumption patterns as customers favor cheaper products (regardless of quality), which is further increasing the already high price competition between retailers at a time when online distribution channels are gaining popularity among final consumers.
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1.    Upstream: Companies who are engaged in the first phase of the production line, notably in the fields sowing and harvesting all kinds of grains and raising animals (cattle, pigs, sheep, goats, poultry and fish). The upstream stage doesn’t involve any processing of food. The major producers of agri-commodities are China, the US, India, Brazil, Argentina, Canada and Russia.
2.    Downstream: In this sub-sector, companies are involved in processing and transforming the extracted agri-raw-materials into consumable products. The full chain includes processing, packaging, transporting and cooking the food. China and the US are the biggest contributors to the global food & beverages industry, making 31.5% and 17.9% of the world’s total output, respectively.
3.    Beverages (also part of the downstream segment): Companies that produce and supply any type of beverage. The beverage industry contains two main categories: non-alcoholic beverages (such as juice, sodas, soft drinks, coffee, tea and bottled water) and alcoholic beverages (beers, wines, and distilled beverages - also known as spirits).
4.    Food retail: Food retail stores are the retailers or wholesaling retail chains that generally stock groceries, fruits & vegetables, uncooked meat products, frozen products and daily needs such as spices, snacks, sweets and others on the minimum operating margin. Based on the distribution channel, this sub-sector can be further segmented into physical stores (such as supermarkets, hypermarkets, warehouse stores) and online food stores.

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Contacts

 
Allianz Trade Economic Research
research@allianz-trade.com
Maria Latorre
Sector Advisor
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