Ian Salusbury investigates the prospects
for the food and beverage industry.

You can’t open a newspaper these days without reading about soaring food prices and global shortages. What impact are these changes going to have on the food and drink industry, and how is this increasingly globalised industry going to be affected by issues such as the growing demand for biofuels and concerns about an obesity ‘epidemic’?

Staple foods such as wheat, rice and maize (or corn) have taken their place alongside other commodities, like oil and metals, in experiencing dramatic price increases over the past year. Speculation by financial traders accounts for some of these price rises but they are also due to a range of other factors, including crop failures brought about by global climate changes, increased demand as the world’s population continues to grow and the diversion of food crops to biofuels.

Additionally, more people now live in urban areas than in rural ones. This shift is accompanied by a westernisation of diets: the consumption of convenience foods, meat, fish and dairy products increases and fewer vegetables and staples like rice are eaten.

The issue of food provides a stark illustration of the split between developing and developed countries. While one part of the world struggles with food insecurity, an excess of food (or an unbalanced diet) creates problems in the other. Spending on food absorbs 55% of household income in rural Pakistan, compared to only 9% in UK and Ireland (the countries with the lowest proportion of spending in the EU).

Prices have spiralled over the last year. Corn prices rose by 31% in a year, soya by 87% and wheat by 130%. Rice prices have also gone up sharply, rising 20% in just the first quarter of 2008. These increased prices also have an impact on other food prices – as the price of animal feed rises, so do the costs of raising animals, thus pushing up the price of dairy products and meat. Food riots have occurred in countries all over the world, from Haiti to Egypt to Indonesia. The head of the UN World Food Programme said that in the last 6 months the number of people requiring food aid rose by 100 million and described the effects of the price rises as a ‘silent tsunami’. In response to the rising prices, some people have started to change their usual diets. Countries that are more usually associated with rice, such as India and China, are looking to boost the amount of potatoes they grow, as they require little water to grow, mature quickly and yield up to four times more food than wheat or rice.

Governments have also responded to the crisis by increasing their food aid, with the US pledging an extra $770M in the last month.

Western nations have been criticised though, for their continuing use of agricultural subsidies for their own farmers, which skew the market. Technology may provide part of the solution to the food crisis in the longer term, as genetic modification can create crops that are resistant to particular pests or rice that has a higher nutritional value - but in some parts of the world this technology has met consumer resistance.

In the developed nations, there are still a substantial number of people whose supply of food is insecure. In 2006 in the US, 4% of households were described by the US Department of Agriculture as having very low food security, meaning that food intake was reduced for household members due to poverty. Almost 11% of households were said to be food insecure at some time during the year. Generally though, the focus in the developed world has been on inappropriate diets, which have led to the surge in obesity. The Institute of Food Research in the UK has calculated that diet-related illnesses currently cost the National Health Service (NHS) £20bn each year.

Coronary heart disease and cancers are the two biggest contributors to these costs, but a key concern for the future is obesity. A report in the British Medical Journal warned that health service spending would have to rise to keep pace with the increasing numbers of obese people and even predicted that treating obesity-related conditions, such as diabetes, could bankrupt the NHS. Currently 1 in 5 Britons are said to be obese, but it is estimated that the proportion will be 1 in 3 within just 2 years.

Governments may use several policy levers in tackling excessive consumption of sugar and fats. Restrictions on advertising, regulation of ingredients (such as trans fats), more labelling and taxation are all likely to be employed. In the developed world, consumers now spend more on eating out than on food for eating at home, so any measures taken will address the food service industry too. For example, restaurants in New York will soon have to state the calories in every dish on the menu. Advertising of food brands to children and adolescents has been compared by some commentators to the way tobacco used to be advertised, and it seems likely that regulations will be tightened.

Worries about diet have stimulated the creation of an array of foods with reduced fat and sugar content. Manufacturers are now taking this a step further by developing functional foods. It is claimed that in addition to their nutritional content, functional foods can deliver various health benefits, such as a healthier heart or stronger bones. Pro-biotic yogurts and cholesterol-reducing spreads are the most well known examples of such foods.

Functional foods are becoming increasingly popular – the just-food consultancy predicts that the global market for these foods will reach $90.5bn by 2013. Allergies have also been on the rise, creating a whole new food sector to provide foods that are free of dairy products, gluten or nuts.

Companies
The food and drink industry encompasses all those companies involved in the process of taking food from ‘farm to fork’ and it forms a major part of all economies. As food is a basic human need, so demand is assured, making it more stable than most other industries. In the UK, the industry makes up the largest manufacturing sector, employing 470,000 people.

The industry is now having to deal with unprecedented price rises of its raw materials. However, Professor Bruce Traill, Director of the Centre for Food Economics Research at the University of Reading in the UK, took a sanguine view of the effects that the price rises of foodstuffs will have, “We aren’t seeing huge increases in prices of manufactured products, largely because agricultural prices have become an increasingly small share of the total cost. I don’t really see it having a huge impact on manufacturing.”

In Europe, the commercial landscape is dominated by multinational companies. The companies with the largest sales are Nestlé, Unilever, Heineken, Danone and Danish Crown Amba. Continued consolidation in the sector is predicted in a report prepared last year by Professor Traill on behalf of the Food and Drink Federation (FDF), the group representing the UK food and drink industry. He described globalisation as an ongoing process and identified one particular element as being a possible driving force now, “It’s a question of whether global retailing becomes a much more substantial component of the overall retail sector, which I think would then encourage global sourcing by the retailers, leading to greater homogeity in their stores and their offerings.”

Other trends predicted in the FDF report were: a squeeze on mid-level brands in favour of premium and economy brands; a continued emphasis on health foods and also environmentally responsible products; an ongoing consumer focus on convenience and value; continued growth in retailer power. As an illustration of the last point, the nine main supermarket groups in the UK accounted for less than 50% of food sales in 1990. By 2007, this had reached around 85%. The top three retailers alone (Tesco, Sainsbury and Asda) are now responsible for over 65% of all sales, compared to 28% in 1990.

Speaking from a gas supplier’s perspective, Steven Finley, Head of Linde’s Beverage Industry Segment, confirmed that a switch to healthier products is taking place, “One of the biggest trends is that we’re seeing more of a focus on wellness and health. Especially in the developed markets (for example, North America and Europe), there is a shift away from the carbonated beverages to healthier alternatives, such as bottled water, teas and juices.” He also backed up the survey’s findings on the environment and highlighted the opportunity that this creates, “Anything that can be done to help our customers reduce environmental emissions or reduce the amount of water used is helpful to them. There are some technologies we have that we are exploring that might be useful in that area.”

Monika Lammertz, Senior Manager for Food at Messer, was also upbeat about the potential for the gas industry in this field. She noted that it could capitalize on two key trends in the food industry, globalisation and increased regulation. She outlined the effects of these trends, “The concentration of the industry means bigger production facilities: bigger mixers, bigger freezers, bigger storage rooms.

This, combined with recent regulations, means it’s more critical to control temperature, to control hygiene, to control all the cold chain, from harvest through processing and transport.” She summarises Messer’s experience of globalisation in the food and drink industry as positive, “Globalisation helps us because if we have good connections in one country, then when a customer develops a new production site in another European country, it is easy to say “We are already your supplier in numerous countries, for this as well as other applications”.

She explained how regulations that now treat gases used in the food industry as foodstuffs, have both increased commercial opportunities and added to the demands on suppliers. New processes have had to be adopted by gas suppliers, such as the use of dedicated storage cylinders and the introduction of use-by dates.

As for market conditions, Lammertz did not think that the increase in food costs will have a dramatic effect on gas suppliers’ business with the food industry. She noted that the freezing or chilling costs of the food manufacturing process are very small components (between 1 and 2%) of their overall costs. And Linde’s Finley pointed to the economies that are growing strongly (in Asia and eastern Europe in particular) as having particular growth potential.

Summary
The food and drinks industry faces a complex situation. It may be that the growth in agricultural prices will have long-term effects on the industry. However, if market mechanisms act as expected, then the supply of food crops should increase, which should at least see a slow down in price rises. The industry also has to adapt to changing eating habits in both the developed world and the developing world and to respond to concerns about unhealthy diets. In any event, the food and beverage industry will continue to be a major market for gas suppliers.


Biofuels
The problem of increasing food prices has been exacerbated by the use of crops like corn for other purposes, particularly biofuels and bioplastics. The use of biofuels such as ethanol has been seized upon by governments anxious to deliver more environmentally friendly energy policies.

In the European Union there is a target that all transportation fuels must include 5.75% of biofuels by 2010, rising to 10% by 2020. The FAO forecasts that the production of ethanol from corn in the major economies will double in the decade from 2006 to 2016. The US and Brazil are the dominant producers; 30% of the US corn crop may go to make biofuels by 2010, while annual production in Brazil was predicted to reach 44 million litres by 2016. However, a number of researchers have suggested that biofuels actually damage the environment: the growing of some crops is said to use up more energy than they produce and rainforest may be cleared in order to grow these crops.

A recent investigation by Chemistry World magazine has indicated that the biofuels success story may be about to falter. The increase in raw material costs coupled with over-capacity in the industry may see a large fall in profits for the biofuels industry. If the environmental concerns are also substantiated, then the enthusiasm of governments may wane and the biofuels boom may be over.