UK sector snapshot – Agrifood
Will this harvest festival mark a turnaround for UK farming and food businesses?
Insolvencies have soared in the agrifood sector over the last few years against the backdrop of the war in Ukraine, extreme weather and high commodity prices. There has been some relief this autumn with lower inflation but the squeeze on margins continues. Businesses in the agrifood supply chain need strong credit management measures to avoid being consumed by bad debt.
Our last Barometer report in July 2023, Coface assessed the Western Europe agrifood sector as high risk for insolvency and non-payment.
Unsurprisingly, geopolitical events were the leading source of price volatility. First, the impact on supply lines caused by the war in Ukraine (Ukraine is a major supplier of cereals while Russia is a leading exporter of fertilisers and energy) but also protectionist measures by other countries particularly the export bans imposed by India.
The sector’s reliance on chemical fertilisers, controlled storage conditions and freight transport meant they were particularly vulnerable to energy and input price inflation. Producers also had to contend with adverse weather conditions such as flooding and extreme heat, along with biological hazards like bird flu.
The current picture
A few months later there are some indications that food price inflation is easing in the UK and it seems some European harvests have been better than feared. However, we are unlikely to upgrade our risk assessment in the UK any time soon because agrifood insolvencies remain very high.
At the other end of the supply chain, non-specialised retailers (incl. supermarkets) and food and beverage service activities (restaurants, pubs, etc.) are also seeing rising insolvencies which will be directly felt by their creditors and impact demand more generally.
The biggest concerns in the UK agrifood sector include:
- The squeeze on margins remains severe – producers continue to face and high input costs because of the factors we set out above, while the cost-of-living crisis (mortgages, energy etc) means household purchasing power has waned with consumers becoming more selective and price conscious.
- Confidence within the sector has deteriorated – a number of surveys in the past year by organisations like the NFU, Farmers Weekly and DEFRA’s Farmer Opinion Tracker have shown that confidence among producers is low. Farmers in the DEFRA survey cited external factors like input price changes, the weather, food security and trade agreements with others which were leading them to diversify into non-farming areas or make other changes to their business. Continued uncertainty about the future of the sector is likely to hold back investment and growth.
- Shortages – the latest Food Security Report by the Environment Food and Rural Affairs Committee, published in July, highlighted problems with insufficient labour (especially for seasonal work), reliance on a single UK nitrogen fertiliser plant, land use and processing capacity within the supply chain.
If you are a business within the agrifood supply chain it’s important to heed these warning signs and be proactive in your credit management. The situation can change quickly, especially when margins are tight.
- Evaluate where you sit in the value chain so you know who you are selling to but also your suppliers. You need to fully understand the risks you are facing so you can take appropriate steps to address them.
- Ramp up your due diligence procedures for prospective customers and suppliers (as well as existing ones when something changes eg a request for more credit). With access to real-time financial, trading, payment, and fraud information on over 180 million companies worldwide, Coface Business Information is a valuable partner when it comes to vetting your trading partners.
- Track your current risk of bad debt by monitoring the payment behaviour of existing customers. Coface Debtor Risk Assessments (DRAs) indicate a company’s probability of payment default over a twelve-month period based on payment incidents and the latest business intelligence. That real-time data means we can flag up potential problems at an early stage so you have time to act.
- Protect your bottom line. Some businesses self-insure by setting aside funds to cover a potential bad debt but there’s always a risk this won’t be sufficient and prevents you from making the money work for you. Credit insurance indemnifies you against losses arising from non-payment for goods or services, as well as unexpected issues like supply chain problems, political events, and natural disasters. By giving you the confidence to open or increase credit lines, a policy could put you at a distinct competitive advantage in a challenging agrifood sector.