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Supply Risk: The (Dinner)Table Stakes Just Got Higher

April 8th, 2008 · by Tim Minahan · 2 Comments · costing, enviro/social sustainability, supply management, supply risk

About a month ago I had dinner with the head of supply chain for one of the world’s most recognized food service brands. We weren’t even through the salad course when he lit into me about previous Supply Excellence posts encouraging buyers to consider alternative fuels, materials, and lighting methods.

“Next time you’re at one of those fancy cocktail parties and folks go on about the benefits of alternative fuels, tell them they’ll pay for it at the dinner table.” He went on to tell the story of how one of his tomato suppliers threatened to plow over its fields and plant corn for ethanol unless he conceded to price increases.

He was right to be angry. But his anger was somewhat misplaced. Ethanol is only one (and, considering limited production and distribution infrastructure, the smallest) of culprits for rising food prices. Rising global food demand, quality scares, and crop hoarding have been at the root of sprouting food prices.

In fact, economist Elizabeth Baatz (editor of the closely watched ICE-Alert) warns that input costs for grains and margin pressures for food processors could send food staples — from rice to tortillas — up more than 20%. In fact, rising rice, corn, soybean, and other crop costs prompted Baatz and her Thinking Cap Solutions team to rank nine food manufacturing sectors on the Top 20 inflation watch list out of the more than 371 U.S. manufacturing industries they track.

According to Thinking Cap’s analysis, food buyers can expect the biggest price boosts in dog and cat food, flour-based mixes and doughs, and rice milling. (Recent reports from The Wall Street Journal last week suggest that the rice crisis may be even worse. Prices for the grain have more than doubled since the beginning of the year, climbing to a record $760 per metric ton. The boost is pegged to increased demand from Africa, crop hoarding in Asia, and a pest outbreak in Vietnam.)

(Click to table to enlarge.)
Food Commodity Price Trends.jpg

Ironically, my dinner companion is offsetting some of these increases through sophisticated contract hedging. Yet, other businesses (and consumers) that lack the volume or frequency for food buys will certainly pay more at the checkout. “Consumer staples companies generally do well in an economic downturn and in periods of increased inflation, since they often can pass higher costs on to consumers,” said fund manager Steve Neimeth of AIG SunAmerica Asset Management in a recent BusinessWeek article.

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2 responses so far ↓

  • 1 Leonardo Capogrosso. // Apr 10, 2008 at 8:20 am

    Dear Tim, i share your view but you omitted the fact of two consecutive years crop failures in Australia, one crop failure in Canada, a poor rice harvest all over Asia, draught in northern China and this wraps it up not to mention Africa.
    Sincerely yours.

  • 2 Tim Minahan // Apr 12, 2008 at 6:25 pm

    You are correct. In addition to the swelling demand for food around the world, there has been an uncharacteristically high incidence of droughts and infestations. Instability in the global food supply may be our biggest supply chain challenge yet.

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