Credit risk rises in food sector
Credit risk is on the rise in the food industry as increased manufacturing costs continue to rise, according to the latest Food and Beverages industry report from Atradius (www.atradius.co.uk).
This year output for the UK food and beverages market is forecast to grow by more than 3%, having rebounded after a 5.3% contraction in 2020. Last year saw the market grow by 4.1% as retailers benefited from increased demand, but the report warns that the pandemic and Brexit are still having an impact, with the implications presenting a particular challenge for food producers and processors.
Cost increases for commodities, energy, fertiliser, transportation and packaging have increased input prices along the value chain and the cost implications of customs declarations and local content audits as a result of Brexit are also having an impact, despite the EU-UK non-tariff agreement. The exit of skilled, EU workers from the UK labour market is contributing to mismatches in the labour market, with additional cost pressure coming from the need to increase salaries to retain or attract staff.
“Despite the overall outlook for the food and beverage market in the UK being fair, challenges are certainly mounting for food producers and processors,” says Darran Tilke, Senior Underwriter Food & Agriculture, Atradius. “Although the EU-UK non-tariff agreement is positive, we’re still seeing a significant impact from Brexit which is expected to continue into 2022 – not just on input prices, but on the availability of skilled labour to help businesses meet the increased demand from retail.”
The report also details how, almost two years on from the first UK lockdown, the COVID-19 pandemic continues to have an impact. Additional sanitation protocols and absences due to illness or self-isolation have also added to cost pressures for the UK food and beverage market. Atradius expects the margins of many businesses to deteriorate, as food producers and processors struggle to pass on input price increases to retailers, leading to a decrease in credit risk quality for many businesses in the coming months.
“The pandemic is certainly still impacting businesses of all kinds across all sectors. With the end of government support, and input cost inflation hurting profits, we’re expecting an insolvency increase of about 20% in 2022 compared to 2019, which would take us back to normal levels,” comments Tilke.
“With insolvencies forecast to increase, it is essential that businesses are protected against non-payment. Having a comprehensive and proactive credit management strategy is one of the best ways businesses can be prepared to weather the storm in 2022.”
The full Atradius report can be downloaded at https://atradius.co.uk/reports/food-industry-trends-united-kingdom-2022.html