Everybody Eats: Why is Food Processing Risky Right Now?

Over the past year, our clients have discovered that a variety of food related businesses — processors, growers, cooperatives and distributors — have financial problems. This trend affects every food sector — seafood, meat, poultry, fruits, vegetables, nuts, row crops, eggs and dairy — as well as every size and type of business, from private family-owned small businesses to large public companies or cooperatives.

The problems these companies are experiencing are significant and affect their ability to survive to the next crop cycle or season. While nontraditional lenders are often able to show more patience with their borrowers, even these lenders are concerned about their borrowers’ survival possibilities.

As lenders and as borrowers, both sides of the borrowing relationship must assess the risk and anticipate cash flow for the next year. Let’s consider the problems that have recently emerged and assess portfolios and operations accordingly. We have identified the following drivers as especially problematic.

As consumer tastes have evolved, businesses along the previous and current processing chains have been impacted. Consider the changes consumers have made as a result of simple decisions:

• Purchasing fresh food rather than processed
• Selecting organic food options (who hasn’t seen the nonGMO or organic tags on food?)
• Meal delivery service expansion (internet-based and now store-based options for ready-to-prepare meals)
• Take-out meals (grocery stores are evolving into fast casual restaurants).

In another industry, consumer preferences moved to non-animal-based milk products, which affected traditional dairy farms and the processors who served them. The promulgation of non-dairy alternatives now includes every nut and grain option in a carton, which looks like the traditional milk carton and is found in refrigerator cases. Supply and demand has certainly impacted dairy, but as substitutes fall in and out of favor, the replacement products, such as nuts, are also experiencing large price swings.

Even as demand for products grows, in many situations, the farmers or producers are changing their crops faster than supply is growing. Even with a fruit or nut tree taking two to three years to produce, if many farmers change their trees at the same time, supply quickly exceeds demand. This puts additional pressure on the prices paid for alternative crops.

Milk prices began to drop in 2011. Almond prices were increasing, causing many farmers to convert acreage from dairy farming to nut farming. Almonds hit a high in 2015, but supply also increased, pushing prices back down.

In terms of walnuts, there was a difference between U.S. supply and demand, while worldwide supply and demand were closer together. The pressure on U.S. walnut producers has been significant.

As state or federal regulators change requirements, businesses may incur significant costs to meet new rules.

Changing Tariffs

Food Safety Issues

In one situation, the problem was a USDA inspection-related issue. But in the other, a processing plant changed its supplier of materials, and the new product did not perform well. The company did not manufacturer product and leave it on the shelf through a normal shelf life cycle. As a result, the problem was uncovered when the product was being shipped to stores. This caused significant additional cost to destroy product and risked the availability of product to fulfill orders.

What Does This Mean for Borrowers & Lenders?

Forecasting tools must include sensitivity analysis, which adjusts performance based on variations in unit sales prices, taxes and tariffs, volume and other factors. Company performance must be stress tested.

Daily, weekly and monthly key performance indicator reports are critical to monitoring performance and anticipating expected changes in labor, raw materials, production, consumer demand and overall expenses.

The food growing and processing sector is certainly one where the adage, cash is king, should be the guiding principal.