Agrifood

The sector copes with poor crops upstream and retailers’ pressures on prices downstream

Sector
Value

6000bn USD

L

Low Risk for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Favorable outlook for the middle run, fueled by global population growth
  • Demand boost, given the rise of a new middle class
  • Financial structure of food companies sound enough on a global average
  • Uptrend in the beverages subsector, especially among the most expensive ones
  • Upstream food sector suffering from too poor crop prices
  • Downstream food processors struggling with weak margins
  • Strong dependence of food processing industry on its main outlet (i.e. retail)
  • Crop harvesting plagued by increased drought or flooding worldwide

What to Watch?

  • Fallout of extreme meteorological events on crop harvests and prices
  • Trade tensions between the US and China that do not bode well for downward food tariffs
  • US packaged-food companies operating in a highly mature market 

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

Key players

Country Role Sector risk
United States

#1 Exporter

#1 Importer

#2 Producer

A

Low risk

China

#1 Producer

#2 Importer

B

Medium Risk

Germany

#3 Exporter

#3 Importer

B

Medium Risk

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Sector Risk Analyst

Marc Livinec

marc.livinec@eulerhermes.com

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