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Why the American food sector is optimistic about 2023

December 19, 2022, 11:49 AM UTC
Consumer absorbed record inflation in 2021 and 2022. As inflation subsides, the outlook is looking up for the U.S. food sector.
David Paul Morris—Bloomberg/Getty Images

In the last six months, the prospects for food, beverage, and agribusiness have started to turn around. In late 2021 and early 2022, post-pandemic inflation, compounded by supply chain disruptions, drove the cost of commodities to levels not seen in a decade. Suddenly, $8/bushel corn, $18/bushel soybeans, and $120/barrel oil were seemingly the new normal. 

However, because food inflation was both sharp and sustained, these businesses found their customers willing to accept price increases–and, because inflation was widespread across the industry, those who acted swiftly experienced better performance. In fact, businesses that raised prices sooner rather than later found themselves in a more advantageous position than those who held back.  

Now that commodity prices have fallen and runaway inflation has started to subside, food, beverage, and agribusiness companies–even those that didn’t raise prices–may have some breathing room on the horizon. The food industry is starting to see light at the end of the tunnel despite continued high labor costs and lingering pandemic-related operational disruptions.

Removing costs from the equation

Food industry margins have been reinforced by a number of post-pandemic shifts that are adding flexibility to the value chain. Among the most striking has been the dramatic growth of the contract manufacturing market.

Contract manufacturing, also called co-manufacturing, typically refers to the production of food and beverage items for brands and retailers. However, many of these specialty manufacturers are expanding their offerings to include packaging, custom formulation, and research and development services. Brands and retailers are taking advantage of these offerings because it enables them to transform into more focused, streamlined, and resilient companies with more targeted asset footprints.

Co-manufacturing served as a lifeline during the pandemic as consumers stayed and worked from home and retailers and brands experienced a sharply rising demand for groceries. It enabled retailers to scale up rapidly while allowing co-manufacturers to focus on what they do best–devoting themselves to specialization without the distraction of marketing and branding.

In the face of rising labor costs and labor shortages, restaurants have, too, adopted innovative ways to alleviate tight margins with automation. One obvious example is the self-order kiosks and tablets that simultaneously fulfill a critical function and relieve waiters and cashiers from excess demand.

Automation has also found a home in the kitchen. Some restaurants are purchasing menu items that have been partially prepared, enabling them to alleviate certain tasks for chefs and line cooks. A number of chains are installing robots to take on straightforward, repetitive tasks such as making pizzas or cooking fries and tortilla chips. These examples just scratch the surface of innovation in this space. 

Broadly speaking, the adoption of technology–artificial intelligence, machine learning, predictive analytics, and computer vision–has the potential to revolutionize every sector of the food, beverage, and agribusiness industry.

Becoming more resilient

Smart pricing, specialization, and technological innovation have all contributed to tailwinds in the industry, but if the last few years have taught us anything, it is to expect the unexpected. The pandemic and the conflict in Ukraine highlighted the complex interdependencies that are inherent to our globalized economy–and the ease with which these links can be broken but also mitigated.

The U.S. is in the fortunate position of being both food and energy independent. Domestically, we’re a huge producer of commodities of all types–and if we are decoupled from the global food system, we have the capacity in many areas to make up any deficits.  

At the same time, the U.S. is not immune from the impacts of changing weather patterns that have brought floods as well as water shortages to the rest of the world. For instance, this year, Spain, one of the world’s largest olive oil-producing countries, was devastated by extreme heat and drought. To ensure that tailwinds survive the impact of volatile weather, food, beverage, and agribusiness are making a concerted effort to cultivate multiple suppliers for the inputs they depend on.  

As a result, the domestic outlook for food, beverage, and agribusiness remains positive. Margins are beginning to improve. The most stressful time for the food industry is–as we have seen–when inflation is on the rise. During recessionary environments, the food industry has historically proven to be a reliably strong performer, benefitting from falling labor and commodity prices. And certainly, lessons learned in the past two years will only bolster that resilience.

Colin Guheen is the managing director of food, beverage, and agribusiness investments at Capital One.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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