Food processors are facing significantly higher ingredient prices due to supply chain issues, the COVID-19 pandemic, geopolitical tensions and other factors. Prices for cooking oils and shortening rose 44% between February 2021 and February 2022, according to industry trade group CPG Consumer Brands Association (CBA). The cost of wheat has increased by 37.7% during the year.
A number of major players in the food industry mentioned rising ingredient costs during recent earnings calls as a significant issue facing their operations in the first months of 2022. Powder and bulk solids selected three examples to illustrate the complex environment in which food manufacturers currently operate and the steps these companies are taking to alleviate the pressures.
American food manufacturer General Mills is reworking some of its product formulations as shortages of certain ingredients weigh on the company, executives said in a discussion with analysts this week.
“The biggest issue we see is really around material selection,” Jon Nudi, Group President, North American Retail for General Mills, said in the company’s call for the third quarter of 2022. “So the ingredients that go into our factories to make our products work.”
General Mills’ pizza, refrigerated bakery and hot snack businesses faced supply shortages of fats, oils, starch and other inputs in the past quarter. While the company has worked to overcome these issues and recently made some improvements to product availability, Nudi noted that “our service levels are still well below historical levels” for the platforms.
The company’s senior executives now meet once a week to focus on the company’s ingredient needs and communicate with suppliers. General Mills is also beginning to change some of its product formulations.
“In some of our products, we’ve reformulated more than 20 times a year so far,” Nudi said. “Every time you make an ingredient change, you have to change the formulation, which is obviously a lot of work from both of our teams.”
Global producer of protein products JBS reacts to rising prices of raw materials – which are used in animal feed – by raising its own pricesimproving operational efficiency and rethinking its mix of products, markets and channels, the company noted in its fourth quarter 2021 results this month.
“The production cost scenario remains challenging in 2022 with average cost of soybean meal and corn up 31% and 56% year-on-year, respectively,” said CFO Guilherme Perboyre Cavalcanti. . a recent call with analysts, referring to ESALQ data.
In the U.S. market, the company’s operating costs jumped 30% to 40% from two years ago, the company detailed in the conversation, driven by rising commodity prices and labor costs.
Going forward, JBS is working to “ensure that we communicate with our customers about the reality of the grain market,” said Wesley Batista Filho, president of operations, Latin America, Oceania and global plant for JBS. listeners, adding, “Not only the grain, [but] all hidden costs in the US, our operational costs due to labor shortages. »
Iconic American packaged food company Campbell Soup Co. faced a 9% increase in its overall input costs on a rate basis during its second quarter of 2022 which ended in early March.
“Along with other industry players, we have experienced significant inflation in all input cost categories, including ingredients, packaging, transportation and labor,” said Mick Beekhuizen. , the company’s chief financial officer. an earnings call earlier this month. He explained that ingredients and packaging make up about 50% of the cost of every product Campbell Soup makes.
Company executives expect input inflation to persist through its fiscal year, but expect Campbell Soup to remain largely unscathed from fluctuations in the commodity market as most of its needs are currently covered for 2022 and it has little exposure to the Russian and Ukrainian grain markets. “We have around 90% of our products covered [for 2022]which leaves us with a cost of around $150 million that we are still navigating,” CEO Mark Clouse told investors.
Campbell Soup is currently reviewing gaps in its product coverage for the year and planning for contingencies based on where inflation could hit hardest, such as the wheat market.
Food processors will continue to monitor the commodity and ingredient market and adapt as necessary. As the example of General Mills shows, some companies may wish to consider product reformulations if the use of certain materials becomes prohibitively expensive, or if they are simply not available. For the remainder of 2022 and likely beyond, food manufacturers will need to remain nimble in sourcing raw materials and ingredients to ensure service levels remain high.