Low Risk for entreprises
After hitting a 10-year high in 2017, global average Days Sales Outstanding fell by -1 day to 65 days in 2018, a sign of companies taking a cautious approach to their clients’ payment behavior.
The healthy average sector risk in Agrifood is hiding deteriorating credit risk in the wholesale subsector Agrifood remains the second least risky sector in Q2 2018 according to the Euler Hermes sector risk ratings However, one Agrifood company with a revenue > USD50mn goes out of business every 10 days! The wholesale segment is the largest driver of major insolvencies (1 out of 3 insolvent Agrifood companies) Wholesale companies have on average higher leverage and worse cash flow (2.2x and USD6mn in 2017, respectively) than the rest of the Agrifood sector (1.8x and USD8mn in 2017)
Often ranked as the second best sector in terms of risk after pharmaceuticals, the agrifood industry is now struggling to maintain its enviable position. Firstly, global agrifood players have been suffering from a food price slide since last spring. Despite a short rebound in the first half of 2018, the FAO global food price index (including meat, sugar, vegetables, cereals and dairy products) has tumbled again. At end of last year, it had gone down -8% (y/y) and is still showing negative growth today. That makes it all the more difficult for agrifood producers to improve their margins. It also eventually curtails the profitability of the upstream industry as a whole. Secondly, US-China trade tensions could continue to influence food output with farmers in the US potentially cutting back soybean planting as China reduces the protein content in animal feed.
Meanwhile, downstream packaged-food companies have to tackle weak consumer demand, limited pricing power and emerging logistic cost inflation in a context of proceeding with portfolio optimization, especially across North America. As they are committed to paying up for services that get goods delivered at the right time, they also face significant freight-cost inflation, particularly in the subsector of beverages. In the Asia region, they are more dedicated to withstanding smaller food firms which strive to steal market share from them by stepping up discounts.
In 2019, agrifood M&A may emphasize the consolidation of fragmented segments and international markets. Raising the share in fragmented markets is normally less costly than large acquisitions seeking scale, which could fit the bill for US companies like KRAFT HEINZ that appear to bear a high burden of indebtedness. International markets may be attractive to firms struggling to generate growth in highly mature North America. Competition in the Asian food and beverage market should intensify in 2019 as rising trade tensions threaten to hamper economic growth and erode consumer confidence. Yet, the region’s favorable demographics and expanding middle class should position it for faster growth than more mature markets such as North America and Western Europe over the next three years.
Agriculture: Farmers’ insolvencies on the rise because of (much) too low global crop prices
Food processing: Pressures on the uptrend to comply with tighter rules about food safety
Beverages: Market niche in sound shape for future growth
Contact Euler Hermes
Economic Research Team
Sector Risk Analyst