Year after year in the food, beverage, and agricultural industries, the only thing certain is uncertainty. The past two years have supplied all the proof needed of that maxim—and 2024 will likely prove no different. Whether it’s the aftereffects from the COVID-19 pandemic or the ongoing effects of geopolitical events, developments large and small continue to ripple throughout the industry.

“It’s been a challenging few years for everyone, but especially so for anything revolving around food and agriculture,” states Shana Peterson-Sheptak, PNC Bank’s Head of Business Banking. “It doesn’t matter if you’re a farmer, a distributor, a retailer, or a consumer, the effects have been widespread and profound.”

So, what is the year ahead like? Here’s what we anticipate.

Cost of Capital. Still High.

If there’s one topic that dominated the conversation in 2023, it was the cost of borrowing money. Beginning in early 2022, the Federal Reserve began steadily hiking interest rates to tame the pandemic fueled surge in inflation. And those hikes were not trivial either, climbing more than five percentage points over an 18-month period.[1]

As a result, the fourteen-year period of low interest rates came to a resounding end, forcing every player large and small to scramble. While it appears that the Fed has paused its efforts to fight inflation, the effects of this rapid rise of borrowing costs linger.

“The reality of how debt costs have soared has affected every aspect of how this industry operates,” Peterson-Sheptak continues, “It doesn’t matter if you’re a farmer borrowing to plant crops, or a consumer buying a pound of ground beef or enjoying a night out in a restaurant. Higher interest rates have affected everyone’s decisions.”

In this rapidly changing environment, how have businesses managed to cope? As Peterson-Sheptak points out, a relentless drive toward efficiency has been the solution for many.

“We see a lot of companies taking a hard look at their capital allocations and asset strategies for ways to create internal cashflow, improve profit and loss, reduce payables, and slash inventory wherever possible.”

Peterson-Sheptak offers that it can be as simple as making the window between purchasing and selling as narrow as possible.

“As just one example among many, look at the cash conversion cycle—the amount of time between spending money to acquire inventory and selling that product to a buyer. Every day you shave off your cash conversion cycle is one day less you need to borrow money. As a result, the smart players are showing discipline in terms of inventory and purchasing.”

However, even the sharpest pencil can only do so much when it comes to reducing costs, which leads to an ongoing problem that’s occupied the thoughts of almost everyone.

Inflation. Not Yet Tamed

Prices surged in 2022, the result of many factors. As one example, the COVID-19 pandemic disrupted supply chains worldwide. And, while global energy prices were already climbing during the pandemic, the Russian invasion of Ukraine made things worse by creating an immediate spike in prices.[2] That spelled bad news for budgets and CFOs everywhere.

While inflation has slightly calmed down in 2023, rates have yet to abate to pre-pandemic levels. More ominously, some believe the heady days of 2% inflation may prove to be a thing of the past. “We saw costs go up in every possible arena that affects the business,” Peterson-Sheptak continues, “And we don’t see this trend as cyclical, but rather as structural. The entire nature of the economy has shifted.”

One potential factor? Aging demographics mean a slow erosion of work force as a percentage of the total population. As a result, unemployment rates are now at levels that would have been unthinkable just a couple of decades ago. Given that the Law of Supply and Demand is not subject to repeal, fewer workers are anticipated to fill jobs. If not offset by gains in productivity, this, in turn, could potentially drive labor costs higher.[3]

Other obstacles loom large for the industry, too. Even as the United States remains extraordinarily productive when it comes to food, it’s also susceptible to jumps in commodity prices. Namely, the costs of agricultural inputs--fertilizer, in layman’s terms.[4]

“When it comes to components for fertilizer such as potash, phosphates, and potassium, Ukraine and Russia were major—if not dominant--global suppliers,” Peterson-Sheptak states. “With the production of both countries effectively taken offline, that means farmers and fertilizer manufacturers had to scramble, and pay the price as a result.

“The Russia-Ukraine war resulted in input costs soaring to record high levels. Mind you, those prices have stabilized now to lower levels. But, they remain elevated. We won’t get back to those prewar price levels anytime soon, chiefly because there is significant demand for what supply is available.”

Because of this volatility, the USDA’s first 2024 cost-of production forecast for major field crops such as corn, soybeans, wheat, cotton, rice, and peanuts, reveal that input costs are expected to stay elevated into the next growing season, only slightly lower than the record high reached in 2022.[5]

And, of course, there’s the age-old nemesis of weather. As any farmer will point out, food prices are always one drought away from a significant jump.

Is there an answer to higher production costs? Peterson-Sheptak points out how adroit management is key. “Just the same as in manufacturing, we stress the importance of risk management, diversification, and production efficiency as the way to boost income and reduce costs. That’s how to create better odds for more favorable breakeven margins for crops.”

Supply Chains Improve

It’s not all doom and gloom. Peterson-Sheptak finds that companies are coming up with smarter ways to work with suppliers.

“One positive we see is that companies are doing a far better job of projecting demand. As one example, we find that the end consumer is shifting to being home more, or even stockpiling. We see double-digit increases in sales for a lot of products on grocery shelves. Consumers, likely prompted by inflationary pressure, are shifting from branded products to private label. And, when it comes to restaurants, there’s been a move away from fine dining to quick service.

“That means the smart players are working hard to anticipate the next 12 months of demand. In turn, it means they must be more adept when it comes to making projections. We think that will have a positive effect on the industry as a whole over time, creating new efficiencies and productivity.”

In this arena, Peterson-Sheptak continues, there are wise financial moves to make. “Technology solutions with payables and receivables management is one area. Deployment of labor in ways to boost productivity is another. And the securitization of receivables is an option, especially for those companies that wish to avoid cash flow problems.”

Consumers Expect Sustainability

One constant refrain from consumers is this: More and more want sustainability when it comes to how their food and beverages are produced. Peterson-Sheptak has insights here as well.

“It used to be, customers simply weren’t attuned to farming and its effect on the environment. No one questioned where the food came from or how it was made. Now, younger generations are thinking deeply about such questions.”

This emerging trend has created demand for change on environmental issues, ethical business practices, eco-friendly packaging, and other causes. More and more, consumers reward brands that take steps in this direction.[6]

This demand has manifested itself in an important recent policy move. The federal government’s Inflation Reduction Act has allocated $3 billion towards sustainable practices such as cover crops, waste and fertilizer management, and improved grazing practices. The intent is to offer economic opportunity for producers, maintain soil productivity, create cleaner water and air, provide healthier wildlife habitats, and generally conserve natural resources for future generations.[7]

In short, 2024 will serve up fresh challenges for the food, beverage, and agriculture industry. At the same time, a lot of the shocks that previous years brought to the industry now show signs of moderating. But the successful player will keep an eye on the horizon, staying ahead of changes rather than simply reacting to them.