Many companies are now going back to retailers and supermarkets to renegotiate food prices, which typically happens annually toward the end of the year.
Food and beverage conglomerates are mulling their options as soaring commodities costs caused by the conflict in Ukraine force them to pass higher costs on to consumers.
With the warring countries accounting for around one-third of global wheat exports, prices are at an all-time high, but that’s just the tip of the iceberg. In addition, sanction-hit Russia is a major exporter of fertilizer ingredient potash, a shortage of which could lead to lower yields and higher prices for a range of crops. Fuel prices are also making logistics expensive.
“There’s a lot of stress and panic in the system right now,” says Cyrille Filott, global strategist for Consumer Foods at Rabobank, who adds that the industry faces the second round of price hikes in the space of a year.
The first round, largely a result Covid-19 pandemic, was unprecedented. Even in early February, before Russia launched a full-scale invasion, Unilever warned that more price rises were on the way to mitigate an extra €3.5 billion ($3.9 billion) of costs caused by inflation. Similar announcements were made by US group General Mills and Swiss conglomerate Nestlé.
Many companies are now going back to retailers and supermarkets to renegotiate their prices, which typically happens annually toward the end of the year. Companies may have limited means to delay passing costs on to customers this time.
There will be no one-size-fits-all solution. Instead, it will be an issue that applies across many sectors where there is a shrinking gap between the cost of raw materials and consumer prices.
“Some companies buy a lot on the spot markets; others have hedging contracts with financial institutions,” says Filott. “Others will have back-to-back contracts, as in, as soon as they close a deal with a retailer, they purchase all the goods for the lifespan of the contract.”
Negotiations are likely to start in the next few weeks, according to Filott, with agreements likely to be reached by early summer. Retailers will then need to decide when to push prices toward the consumer.
“They will be looking over their shoulder at what the competition is doing,” he says.