Weekend peace talks between the US and Iran ended without a deal. Oil prices have jumped back up to over $100 a barrel.
Now a US blockade of Iranian ports is expected to begin today: although more details of how this will be implemented are yet to emerge.
Global markets remain in a state of uncertainty. But what does that mean for food and beverage? Many of the effects on companies are indirect, which makes plotting out their potential impact much harder.
But six weeks into the conflict, it’s clear where the global supply chain has been shaken up. Food and beverage professionals know they need to anticipate where it could affect their business.
Agility will be key to responding to various scenarios as they emerge.
So where do food and beverage leaders need to focus their attention - and what can they start to do to mitigate the challenges?
1) Transportation
The price of oil, affected by the lack of movement through the Strait of Hormuz, has been skyrocketing.
That, in turn, has a huge impact on the costs of transporting raw materials and goods.
For food and beverage, the greatest exposure is in categories that have to cover long distances: such as those carried over oceans by container and imported and exported. That affects categories such as coffee, cocoa and spices: which have to travel from their origins to end consumers.
In trucking, fuel surcharges are often calculated separately from annual contracts and that means costs can move around significantly and unpredictably.
Food and beverage leaders need to look at where they’re most exposed to transportation costs: and understand that costs will remain volatile.
2) Energy costs
The US food and beverage industry is one of the most energy-intensive manufacturing sectors in the country, says Bernardo Silva of CEO advisory firm, Teneo. That means the Iran conflict creates a ‘meaningful energy risk’ for companies.
The most vulnerable sectors are those with large thermal or refrigeration loads: including dairy, meat, poultry, grain, beverages and baking. That’s because energy costs like pasteurisation and cold storage are essential for food safety.
Food and beverage companies need to think about where their energy supplies are coming from - and how that could be impacted in the future. That doesn’t just mean oil: it also means LNG.
3) Raw materials
The Persian Gulf region is a critical hub for global fertiliser: accounting for around 49% of global urea exports and 30% of global ammonia exports.
Timing is critical because fertiliser must be bought around crop needs.
The raw materials for packaging are another key issue. Polyethylene is particularly exposed: a plastic that is used in everything from plastic films to plastic bottles.
“Well over 80% of polyethylene is coming out of the Middle East,” said Brent Hasenkamp, SVP of manufacturing, CPG & industrial distribution, at supply chain specialists o9.
Aluminium is also an important material affected by the problems in the Strait. “Both aluminium and polyethylene pricing have increased quite dramatically,” said Hasenkamp.
4) Cyber attacks
A lesser-known threat comes from cyber attacks. Modern warfare is no longer confined to physical battlefields: and US businesses could be particularly vulnerable.
The conflict, says Bernardo Silva of Teneo, reiterates the importance of basic cyber hygiene.
“Companies have the cost of protecting and mitigating against a cyber attack, or the fallout of being a target,” he said.
Food and beverage companies should treat cyber security as a priority at all times.
5) Inflation
The impact of the above factors will take time to permeate across the industry. But they all end in the same place: inflation.
In fact, this could be the biggest concern to the food and beverage industry: with consumers already under pressure and unlikely to absorb further cost increases.
Companies need to have a clear sense of how much they can absorb costs, how much they’ll have to pass onto consumers, and ultimately what they’ll do if the math just doesn’t add up. That could mean critical decisions on revamping portfolios: such as boosting value offers.
