Food industry fights to cope with geopolitical volatility

All is not well in the world of food and beverage. Geopolitical tensions have made commodity prices unstable. Disruptive tariff barriers from the United States have created uncertainty for businesses globally. Concerns around cyber attacks have ramped up company spending on security, eating into profits.

What is the impact of these factors on the wider food industry? How are companies coping with these threats?

Is food safe from geopolitical uncertainty?Globally, insecurity for food companies is growing, according to new research by ING bank.

Surveys among food company executives have suggested that geopolitical risks have been on the rise. Europe is particularly vulnerable to such risks, due to its greater dependency on energy, raw materials and technology.

Crises such as the war in Ukraine and disruptions to shipping lanes in the Red Sea continue to take a toll on the food system, ING reports.

The increased risk means that dependencies, such as suppliers, can make companies vulnerable, explains Thijs Geijer, senior sector economist at ING. The challenge for companies today is “assessing which dependencies could become such a vulnerability.”

Also read → How can food and beverage guard against geopolitical dangers?These geopolitical concerns have led to uncertainties in commodity and FX markets. Tensions have accelerated volatility for both commodities themselves and agricultural inputs such as fertiliser.

Geopolitical uncertainty is also driving countries to localise their food production, in an effort to protect food sovereignty. While a focus on food security is viewed as positive by the industry, it could have unintended knock-on effects, negatively impacting developing countries and leading to price movements and market distortions.

How will the food system deal with tariffs?Tariff barriers erected by the administration of President Donald Trump have hit many industries around the world, including food and beverage.

This has disrupted a historical downward trend. Previously, we have seen tariffs declining over time, explains Geijer. Now they have spiked, it has created a lot of uncertainty for business. Business has responded in a number of ways.

Some companies, such as Nestlé and Heineken, have suggested that localised supply chains may inoculate them from some of the worst effects of the tariffs, minimising the number of geographic barriers they must cross. However, others, such as Diageo, do not have this luxury.

Larger companies, which are not linked to specific regions for production, are able to do this more easily, explains Geijer. These companies have facilities in more locations around the world, and thus can produce locally more reliably.

Companies with brands or products tied to certain regions, however, are struggling more, with some even dropping revenue growth targets for this year and beyond.

However, while some have suggested that tariffs could lead to EU food and drink companies setting up shop in the US, Geijer points out that such a move could take around three years.

“You need to be quite certain you know that the situation you have today is also the situation that you will have in in three years time, because otherwise the parameters will shift.”

The current volatility of the tariffs means that this certainty is not possible. Therefore, businesses are holding back these decisions.

Other options are still available for companies, such as drawing on their increased inventories, front-loading imports into the US, discussing pricing with suppliers or customers, and optimising supply chains.

Trade wars have also affected food and beverage in more indirect ways. While consumer confidence is low in Europe as well, the situation is more extreme in the US, recently recorded at its second-lowest since 1950.

Low consumer confidence is creating a sense of unease in consumer-facing companies. While food is not as vulnerable as other industries are (Geijer singles out cars, electronics and furniture), there is still a risk that consumers will spend less. Concerns in this area have been seen in many Q1 earnings reports.

The knock-on effects of this could be companies holding back investments, such as, for example, into new facilities or production lines, as revenues themselves are less certain.

The cybersecurity threat to foodCybersecurity is becoming a significant threat for food and beverage. Attacks have already had a severe impact on UK retailers Marks and Spencer and the Co-op, for example. At last, companies are waking up to the threat from cyber attacks.

“In any conversation that we had where cybersecurity was mentioned, there was this general feeling like this is becoming a bigger problem,” explains Geijer.

As a result, many companies are reluctantly spending more on cybersecurity.

They are reluctant because such spending means “not spending your money on something that’s making you more productive, because it doesn’t lead to a better or a higher value product.” Nevertheless, the spending has become a necessity.