Will the agri-food sector cope with the cost shock?

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In the first step of the analysis, we assessed the current situation in the most important sectors of the agri-food sector. For this purpose, we have compiled net profitability ratios for these industries in the first half of br. with their average value in the first half of in 2015-2019, i.e. before the outbreak of the pandemic.

In most of the analyzed industries, net profitability in the first half of 2021 was higher than the average in the first half of in 2015-2019, which indicates that the agri-food sector has generally improved its profitability during the pandemic. Only the following industries: “Production of grain mill products, starch and starch products”, “Production of other food products” and “Production of ready-made animal feeds” recorded lower profitability rates than before the pandemic.

The cost pressure that agri-food companies are currently struggling with concerns mainly four areas: materials, energy, labor, and loan interest costs.
Higher material costs result not only from the growing prices of agricultural raw materials, but also from the prices of packaging, the increase of which is a result of increasing supply barriers.

Rising energy prices result from a number of factors, including a strong increase in gas prices, crude oil prices and prices of CO2 emission allowances).
Increasingly higher labor costs are due to the growing wage pressure observed in food processing.

It is characterized by relatively low wages compared to other processing industries (the average wage in the production of food products in the first half of this year was 13% lower than the average for processing), hence an important factor that intensifies the wage pressure in this sector is the persistent wage pressure in this sector. a strong increase in the minimum wage, often shifting the entire wage grid in companies upwards.

The higher costs of interest on loans result from the carried out in October this year. the first interest rate hike by the MPC since 2012.

Therefore, in the second step of the analysis, we calculated the share of the above-mentioned costs in the total revenues of individual sectors of the agri-food sector.

The industries “processing and preserving of fish, crustaceans and molluscs”, “production of dairy products” and “processing and preservation as well as production of meat products” with the largest total share of costs of materials, energy, labor and interest on loans in total revenues. .

On the other hand, a clearly lower share of the above-mentioned costs in revenues compared to other sectors is observed in the “beverage production” sector, where taxes are of much greater importance in the cost structure (the “beverage production” industry also includes the production of alcoholic beverages).

In the third step of the analysis, we compared the calculated share of the costs of materials, energy, labor and interest on loans in total revenues with the current situation in these sectors. This approach allowed us to determine the relative resistance of individual industries to the currently observed cost shock.

The industries that are most exposed to a cost shock are in the second quadrant of the coordinate system:

“Manufacture of grain mill products, starches and starch products” and “Manufacture of prepared feed and animal feed”. It follows that they are weakened after the pandemic, and at the same time the share of costs of materials, energy, labor and interest on loans in their total revenues is relatively high compared to the entire sector.

The industries from the fourth quarter are characterized by the highest resistance to cost shock: “Beverage production”, “Processing and preserving fruit and vegetables” and “Production of bakery and flour products”. Their current situation is better than before the pandemic, and at the same time, the share of the above-mentioned costs in their total revenues is lower compared to the entire sector.

The industries from the first and third quarters are in an intermediate situation. The industries of the first quarter: “Processing and preserving meat and production of meat products”, “Processing and preserving fish, crustaceans and molluscs”, “Production of vegetable and animal oils and fats”, “Production of dairy products” on the one hand achieve higher profitability than before the pandemic, on the other hand, the share of costs of materials, energy, labor and interest on loans in their total revenues is relatively high compared to the entire sector.

In turn, the only industry in the third quarter (“Production of other food products”), on the one hand, is characterized by a lower share of the costs of materials, energy, labor and interest on loans in total revenues compared to the sector, on the other hand, its financial situation is currently worse than before pandemic.

We believe that the growing cost pressure in the Polish agri-food sector will continue in the coming quarters. This is mainly due to the expected further increase in agricultural commodity prices, growing wage pressure and the continuation of monetary policy tightening by the Monetary Policy Council.

Taking into account that the agri-food sector operates in conditions of relatively low margins (the average sales margin in the production of food products in the first half of this year was 4.7% compared to 6.9% in the entire processing industry), companies have limited possibilities of their reductions to compensate for the higher operating costs.

In this situation, companies will, on the one hand, be forced to look for additional savings, which will accelerate the restructuring processes initiated by the pandemic in the Polish agri-food sector, especially visible in the sectors “Beverage production”, “Production of bakery and flour products”, “Manufacture of dairy products” and “Processing and preserving meat and production of meat products”.

On the other hand, they will try to pass on higher production costs onto consumers, which will be favored by low food prices in Poland compared to our trading partners.

Taking into account the results of our analysis, such a phenomenon will be particularly visible in the following industries: “Processing and preserving meat and production of meat products”, “Processing and preserving fish, crustaceans and molluscs”, “Production of vegetable and animal oils and fats”, “Production of dairy products “and” Manufacture of other food products “.

This supports our scenario, according to which inflation in 2022 will increase to 5.5%. y / y versus 4.9% in 2021

Credit Agricole report


About Eric Wilson

The variety offered by video games never ceases to amaze him. He loves OutRun's drifting as well as the contemplative walks of Dear Esther. Immersing himself in other worlds is an incomparable feeling for him: he understood it by playing for the first time in Shenmue.

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