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What to Watch
Second best sector in terms of sector risk after Pharmaceuticals, Agrifood is expected to stay in good shape overall in 2018. However there are some risks associated with the upstream part of the value chain (farmers and growers): La Niña, a weather phenomenon consisting in cooling of some parts of the Pacific Ocean, is likely to lead to rising prices of food commodities such as sugar, coffee, rubber, rapeseed and corn. In 2017, the global food commodities index, FAO Food Price Index, increased by +8% y/y, while during the last occurrence of La Niña in 2010 it rose much more (+22% y/y).
The M&A activity in the sector was down by volume (-32% y/y), yet a volume growth can be expected as the equity market correction in the beginning of 2018 made valuations cheaper, while balance sheets of the key companies remain strong with large cash balances. The year 2018 has already had a good head start after Nestle’s announcement of the sale of its US confectionary business to Italy’s Ferrero for about $2.8 billion. The Swiss group is changing its strategy to become more focused on the wellness and health category of products, which is a reflection of trend shaping the whole industry. In the context of an overall lackluster sales growth, this category of products continues to show a double-digit growth on some of the major markets.
Agriculture: Regulation. Increasing pressure is put on farmers to track the origin of all food commodities used in the production process. This additional cost will eventually be passed to consumers
Food Industry: Organic food is the fastest growing product category. Its rising importance is emphasized by Amazon’s acquisition of Whole Foods in 2017
Contact Euler Hermes
Economic Research Team
Sector Risk Analyst