The Global Food Supply Chain

The Global Food Supply Chain

New market opportunities mean big business, and big risk.

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.