Food manufacturers should protect themselves against political instability – such as the Ukraine crisis – and extreme weather by planning contractual protection, warns food law firm Roythornes.
Without protective clauses in supply chain contracts, firms could pay a heavy price if world events or weather caused unexpected price hikes in the cost of key raw materials.
Peter Bennett, head of the food team and partner at Roythornes, urged action. “The impact of price increases and reduced produce availability, however minor they may seem on paper, can pose serious problems for the food supply chain,” said Bennett.
“Put simply, if manufacturers don’t get their ingredients they are not able to make the food, and increasing ingredient costs reduce already squeezed margins.”
‘The reluctance of retailers’
“This raises serious issues for the industry exacerbated by the reluctance of retailers to alter pricing. The result is greater pressure on the manufacturers who will now be looking to build flexibility and clauses into contracts that allow them some leeway when it comes to delivery volumes and lead times.”
Evidence of food manufacturers’ vulnerability to political instability was revealed by crisis in the Ukraine, often referred to as the bread basket of Europe. Turmoil in the country – one of the globe’s biggest exporters of wheat and maize – has resulted in sharp increases in crop prices.
Ukrainian farmers are starting to withhold grain from sale to protect against the country’s falling currency, causing prices to rocket. “As a consequence the price of wheat for delivery in May rose by as much as 5.9% to £3.81 a bushel on the Chicago Board of Trade – the biggest rise for almost 18 months,” said Roythornes. Maize for delivery in May rose by up to 3.7% to a six-month high of £2.89.
If large amounts of produce were to be held back, fluctuations in the price and availability of some foods and ingredients mean manufacturers will struggle to fulfil orders profitably, if they manage to deliver at all, warned the law firm.
‘The problem will only grow’
At home, extreme weather could also disrupt suppliers. “In the UK, the problem will only grow in the coming years as flooding heightens the problems faced by farmers,” said Bennett.
Up to 35,000 hectares of high-quality horticultural and arable land will be flooded at least once every three years by the 2020s, according to the Department for Environment, Food and Rural Affairs. This could rise to about 130,000ha by the 2080s if there is no change to current flood defence provision.
“Flood waters pose numerous risks to livestock, including spoiling animal feed, killing vegetation used for grazing and feed production and depositing harmful chemicals and bacteria on fields,” said Bennett. “The end result of which is shrinking herds in poor health and the coinciding shortages in produce.”
To protect against such events, Bennett advised food firms to allow for them in contracts, as they come up for renewal. “All parties will be looking for additional flexibility and it will be up to the suppliers and their customers to decide the extent of any leeway they need,” he said.
Roythornes’ four top tips on contract negotiations
1. Manufacturers should try to negotiate leeway in delivery schedules, including suspending deliveries entirely, for unforeseen circumstances such as floods and other natural disasters or even for wars and civil disobedience. Consideration should be made for the events which might affect the countries or areas being worked in or ordered from and there should be clarity in contracts as to what the relevant events might be.
2. Be aware that all suppliers will be in the same position and try to come to an agreed and workable solution. Bear in mind that all parties will want to limit their liability in the same way that manufacturers will want to limit its liability to its customers.
3. If a company is contracted to supply an ingredient, cannot do so, and wants to source from elsewhere, it needs to make it clear in the contract that this is an option. Bear in mind traceability and quality control issues.
4. Good communication channels are a must – if there are shortage issues they should be communicated down the entire supply chain as soon as possible.