Food ingredient prices are on the rise. With razor-thin profit margins, even slight increases create ripple effects throughout the industry. The U.N. Food Agriculture Organization (FAO), which follows the monthly rates of the international prices of commonly traded food commodities, recorded a six-year high in March with an average index of 118.5%.
“The increase marked the tenth consecutive monthly rise in the value of the FFPI to its highest level since June 2014. The increase was led by strong gains in vegetable oils, meat and dairy sub-indices, while those of cereals and sugar subsided,” according to the FAO’s latest report.
Short- and Long-Term Cost Drivers
Several long-term factors are driving the rising prices of food ingredients and raw materials:
Rising oil prices: Industry watchers anticipate prices for both energy and fertilizers to increase in 2021 (by 9% and 3%, respectively) after declining in 2020. Food ingredients often travel long distances, and high oil prices inflate shipping costs. And higher fertilizer costs make it more expensive for farmers to operate, increasing the price of commodities.
Climate Change: Extreme weather conditions cause ingredient and raw material shortages and price increases. One recent example is Winter Storm Uri, which caused at least $600 million in agricultural losses across Texas, according to Texas A & M AgriLife Extension Service agricultural economists. Power shortages put manufacturing operations to a standstill. The storm delayed shipping and caused food waste. “Truck drivers were stuck for days waiting to load or unload produce,” The New York Times reported. “Livestock losses include not only cattle, sheep and goats and their offspring that died or were badly injured during the freeze, but also damage to the livestock industry infrastructure,” said David Anderson, AgriLife Extension livestock economist, Bryan-College Station.
Weakening U.S. Dollar: The lower value of the U.S. dollar is contributing to the recent uptick in food prices. From April to October 2020, the World Bank’s Food Price Index increased 13%. During this period, the U.S. dollar (measured against a broad basket of currencies) depreciated 6%. Research shows agricultural commodities prices rise and fall in unity with the U.S. dollar. This analysis indicates nearly half of the food price index increase since May 2020 is likely due to U.S. dollar movements.
In the United States, short-term factors are driving up wholesale food costs. The U.S. Department of Agriculture (USDA) reports “high feed costs, increased demand, and supply chain disruptions due to winter storms in the Midwest and Southern States have driven up prices for wholesale meats and poultry.”
The USDA’s Producers Price Index for Food shows:
Experts predict wholesale pork prices to increase between 3% and 6%.
Forecasts indicate wholesale poultry prices will increase between 1% and 4%.
Analysts anticipate the higher price of soybeans will increase the price of wholesale fats and oils, between 7% and 10%.
“I think food prices are going to continue to increase for probably a good year, year-and-a-half,” Phil Lempert, Founder of SupermarketGuru.com, told NBC News. “Our costs are going to go up for food production.”
Along with policymakers at the Federal Reserve, the USDA expects food, beverage, and ingredient prices to stabilize later in 2021 as the larger economy bounces back, although nothing is certain.
Manufacturers Look to Suppliers to Protect Margins
Manufacturers struggling with higher ingredient costs often seek out alternate suppliers. But as any team knows, that’s easier said than done. Finding and qualifying suppliers is time-consuming.
That’s why TraceGains built Market Hub, a robust sourcing directory for ingredients, items, packaging, and service providers that includes more than 35,000 global supplier locations. When teams need to find a new item, raw material, or ingredient at a more competitive price, Market Hub offers a user-friendly solution to source new suppliers. Users can also search by country of origin, location, halal, kosher, allergens, organic, and several other filters to quickly find what they need. The software streamlines and automates the entire process by allowing manufacturers to communicate directly with suppliers, instantly access the supply chain documents and information they need, and even request samples.
Find out more about how Market Hub can help you find new suppliers quickly.