The Food and Agriculture Organization’s (FAO) Food Price Index experienced a significant drop in July 2022, and we’re seeing prices for cereal and oil products decline as we speak. Here's what this means for food and beverage manufacturers and distributors:
While this sounds like promising news, we do want to note that the decline in food prices brings the average total close to its record high in March of this year–its highest point since 2011. So, while the decline in food prices sounds good on the surface, food prices are still inflated well above average...meaning that food and beverage manufacturers ought to adjust accordingly.
The price of food also saw a sharp increase due to the pandemic and its effect on the supply chain. Inflation, severe weather, and export restrictions from the war in Ukraine also contributed to rising food prices.
Below, we explain why we’re experiencing lower food prices and what it may mean for food manufacturers in the long run.
Contributing factor: Falling oil prices
Part of the reason for lower global food prices is falling oil values. Indonesia prepares to ramp up its exporting operations, and we’ve seen international prices for all oil types fall to record lows. The Vegetable Price Index decreased over 19 percent month-over-month, with palm oil prices seeing the most significant decline.
Impacted food item: Cereals and wheat
The FAO’s Cereal Price Index also saw a decrease of over 11 percent due to falling cereal prices and wheat production. Wheat prices worldwide dropped by over 14 percent due to the Russia-Ukraine export deal and favorable seasonal conditions in the northern hemisphere. Coarse grain products also declined in price from better availability and growing conditions in Brazil and Argentina.
Impacted food item: Meat and dairy
Meat prices did not significantly drop compared to wheat and oil products. The Meat Price Index dropped by about half a percent since June and experts attribute the decline in meat prices to lessening import demands from the largest importers of meat products.
Poultry prices even saw a significant price increase and reached their all-time highs due to the effects of the Avian flu on food manufacturers – and the increase in global demand for poultry products. Experts believe that poultry products will continue to rise due to these factors.
What is the impact of inflation on food manufacturers in 2022?
While some products are falling in price in the global market, plenty of uncertainties could lead to consequences for food manufacturers. The fertilizer prices will likely affect future production for farmers and their livelihood.
Lower food prices directly benefit the consumer but tend to complicate things for food manufacturers.
Falling food prices mean abundant inventories of products and low-profit margins for food manufacturers, leading to lower farmland values and a bleak financial outlook for the agricultural sector.
Potential problem: Labor challenges
The food and beverage manufacturing industry continue to struggle with labor shortages due to the pandemic. Labor challenges started in early 2020, and government restrictions hamper the labor market.
Experts predicted the labor shortage would end after the pandemic's worst days. However, the labor issues haven’t started to normalize just yet. Nestle claimed they could have sold more products if they weren’t experiencing such profound shortages in workers.
Labor challenges prompted intervention by government agencies to increase the funding for the education of potential workers on the benefits of working in the food industry.
The United States Department of Agriculture (USDA) invested $14 million to support workforce training for underserved communities in July of 2022. This was to increase the strength of the meat and poultry sector and restore the food supply chain to pre-pandemic levels.
The USDA partners with higher education institutions to develop the workforce in agricultural communities. By investing in the education of the workers in rural communities, the USDA plans to train them to fill the gap in the labor market.
Potential problem: Logistical challenges
Freight costs have also increased sharply since the pandemic started in early 2020. These shipping and logistical challenges started with lockdowns and increased public safety measures led to higher freight costs. Add in the rising fuel prices, and you’ve got a recipe for a 400 percent increase in the Baltic Dry Index–a strong indicator of freight costs worldwide.
What is the future outlook for price effects for food and beverage manufacturers?
The surge in European gas prices, which reached record-high levels in July, may reverse the trend we’re seeing in declining food prices. Experts also predict that La Niña weather patterns may disrupt the harvesting of crops in 2023 and cause prices to increase again. No matter what happens, the team at Inecta is committed to tracking the ebbs and flows of the industry, keeping you appraised of all relevant information for your sector.
Why use Inecta for your ERP solution?
Food manufacturers need a reliable system to manage all aspects of their business. Those with outdated systems or ones costing your company money should inquire about upgrading to a cloud-based ERP system like Inecta.
We have over 20 years of industry experience and are recognized as a Microsoft partner for creating a software solution that’s proven to manage your business processes from start to finish.
For more information about Inecta and how we can help your food business, visit our website at www.inecta.com.