Euro zone crisis or Potential Emerging Market Risk– Which is a bigger threat to the F&B sector?

4 min read

 

The altitude of impact on US and EU food industry. The financial crisis which hit the euro had a huge impact on the manufacturing sector and the food industry sector was the one of the largest manufacturing sector to be effected by the crisis. The southern European economies namely the PIGS (Portugal, Italy, Greece, Spain) were adversely affected when compared to the western European nations. Also, these are the nations with maximum number of food and beverage companies. On the outbreak of crisis the growth plummeted from 7.6% in 2007 to 4.8% in 2008. The industry saw a decreasing consumer confidence and reduced spending on the premium food products. The crisis saw imports from the Europe’s largest trade partner, US reducing drastically with consumer’s increased preference for local products.

Euro zone crisis or potential emerging market risk– Which is a bigger threat to the F&B sector?
Economic Health

More than the consumer spending the key factors which put the food industry on a downward trend are the reduced investment in agriculture and reduced export demand for agri based products. The financial crisis which hit the reserves in the banks reduced the bank’s lending confidence to the producers with a high default rates. This reduced the farmer’s access to credit, thus largely reducing the farm output due to reduced access to inputs. Also reduced EU budget and low funds allocated to the common agriculture policy combined with falling exchange rates largely impacted the agri produce need for food industry. Amidst the increasing food prices and financial crisis, the governments kept a tab on the increasing retail prices by reducing the prices of primary goods to safeguard consumption.

During the period of crisis, many US food companies saw their sales declining. The direct impact was unemployment as the companies had to reduce the employees staffed in their European centers as a result of reduced production capacities and low investments in R&D. With the euro falling at a considerable rate, the imports became costlier for the consumers and consumers were shifting away from food services. US food companies’ exports grew by only 3.5% in 2012 when compared to 15.3% in 2011. Stocks of companies like DANONE fell due to deterioration of consumption of dairy products in southern Europe. The increase in the taxes in Spain and Italy proved to be a deteriorating point for DANONE dairy sales in these two regions. Cargill, Archer Daniel Midland and Bunge were hugely hit by volatile commodity prices. The commodity market was largely gyrated by the euro zone crisis, more than the food demand supply factors.

Also, the growth rate for the food industry was positive when compared to negative growth rates of textiles, automobiles, chemicals. The EU (27) is still a high income group and thus are seen by major US exporters as the key markets. The key strategy for the companies is to focus on innovation to meet the growing consumer demands for healthy food products.

The period of recovery amidst slow growth :

Food companies in Ireland and UK undertook Mergers and Acquisitions activity to consolidate their supply chains and diversify the consumer base. Food manufacturers were forced to rethink their cost control and focus on pricing strategies without effecting the margins of product sales. Through M&A, companies fathomed the path towards wider distribution reach and economies of scale.

The food and drinks manufacturing was the industry which saw a minimal impact when compared to automobiles, textiles,chemicals, and machinery and equipment. EU which accounted to more than 20% market share in the global exports of food and beverages reduced to 16% in 2013. From the database of FoodDrink Europe the growth is as seen below.

  2012( in € billion) 2011 2010 2009
Turnover 1,048 1.016 952.2 929.2
Employment 4.24 million people 4.22 million people 4.1 million people 4.2 million people
Exports 86.2 76.15 65.3 53.7
Imports 63.2 62.9 55.5 50.7
Trade balance 23 13.7 9.8 3.04

 

The largest exports from EU are to the emerging markets. However, low imports to the slow recovering economies in Europe are the reason for the increasing trade balance. Food companies see an event of financial crisis in Emerging markets as a bigger threat to when compared to the high disposable income economies of US and EU.

Impact of European crisis on the agriculture, food industry in emerging markets:

The banking sector has growingly become conservative on providing trade finance for the companies exporting critical goods to the emerging markets. Companies exporting from developed countries depend on trade finance for exporting critical good to developing countries. This has resulted in reduced access to critical goods to the poor countries. Reduced financial flows from Europe have made the companies look at China and Oil rich economies for finances. However, Chinese banks preference for state owned companies and gulf countries minimal financial help are not being considered as an option by European food companies. Euro zone’s low demand for imports is also a major concern for emerging countries exports value. Furthermore reduced demand for oil in the EU economies will result in a contagion effect in emerging countries with: increasing current account deficits, speculation on fed rate hike, higher tax rates and lower consumer spending, thus creating a cycle of low imports from EU food companies. Slow down in the Chinese growth rate is one such example.

What is the speculation on emerging markets potential risk of a crisis?

Few factors which are seemingly causing a speculation on a potential risk of a crisis in the Emerging markets are:

  • Fed rate hike: While this may improve the emerging markets exports to the recovering US economy, capital flight in investment will result in low consumer confidence and in turn reduce demand for premium foreign food and beverage products.
  • Reducing Oil Prices: With the demand supply constraints being faced in the oil industry and financial reserves of oil revenue dependant countries being depleted, countries like china and India will see reduced exports to the developed economies. This will result in reduced government expenditure, high interest and tax rates, low investor confidence; thus directly impacting wage rates and disposable income.
  • Currency rates: According to Bloomberg index the currency rates of emerging countries have fallen since 2003. India’s rupee, Indonesia’s rupiah and Turkey’s Ira fell at a all time low.
  • Sanctions on Russia: With EU putting sanctions on Russia with pressure from US, in the wake of Russia –Ukraine crisis; has resulted in Russia looking at trade options with china and thus reducing Europe’s exports to Russia. A fall in demand from BRICS countries will hugely impact the food industry than a crisis in European regions.

Is the middle class a likely answer for the food industry?

Euro zone crisis or potential emerging market risk– Which is a bigger threat to the F&B sector?
Euro zone crisis or potential emerging market risk– Which is a bigger threat to the F&B sector?

In spite of bailout provided to the PIGS nations, the euro zone does not seem to recover from the prolonged crisis. The burgeoning population in the Asia pacific region is seen by European food companies as an approach to increase the economies of scale. According to Ulster bank’s chief economist Richard Ramsey, Northern Ireland which is seeing tough times due to Russia’s trade restrictions, global exchange rate volatility, and a potential default by Greece and decreasing farm income is seeing a ray of hope in the form of burgeoning middle class in developing economies. The increasing middle class with their disposable incomes and increasing Purchasing power parity are being targeted by US and European food companies. The money by the companies is being diverted towards improving the infrastructure, supply chains, production capacities, increasing R&D investments. All this while complying flavors with the local ethnicity and providing convenience in the form of increased processed food for the target market. Growing preferences for dairy, meat, bakery & confectionary, frozen foods are some of the sectors the food companies can target on. However, this is not without the fair share of regulation on food safety& security, and nutritional content present in foods.

 

 

 
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