Producers face insolvency risk in first half of 2019
In its annual report for the UK food industry, Atradius predicted high pressure on margins – due to increased import costs and delays in payments – would continue into the new year.
“The trend to low margins and onerous or destabilising contracts remains commonplace in the sector, driven by a need to maintain customer relationships and/or production volumes as a means to cover overheads at the expense of profitability – which is not sustainable in the long term”, said Atradius.
“Therefore it comes as no surprise that producers and processors are increasingly pursuing mergers and acquisitions in order to increase their leverage in price negotiations (and product offering) with major retailers.”
Cash flow challenges
Smaller food businesses will continue to experience cash flow challenges, thanks to larger players pushing the supply chain on price and longer payment terms.
While Atradius advised companies to practise risk mitigation through forward contracts and currency hedging, it understood that many small and medium-sized businesses lacked the resources and skills to manage these mechanisms effectively.
Due to these adverse developments, insurers’ underwriting stance has become more restrictive for the food industry in general. It singled out the meat and fruit and vegetables sectors for their reliance on imports and agency workers – the availability of which has reduced sharply.
“We are also more cautious with the dairy segment, where movement in farm gate prices and adverse weather conditions in 2018 have negatively impacted margins and further increased pressure across the supply chain,” Atradius added.
‘Unable to recoup margins’
“Fixed-price contracts mean producers and processors are not necessarily able to recoup their margins.”
However, despite the current difficult trading conditions across the sector, access to external financing remains reasonably stable. Atradius pointed out that asset-backed lending facilities are extensively used throughout the industry.
“We maintain frequent contact with companies within the sector allowing us to remain very close to developments in the industry and vigilant to changing dynamics and challenges throughout the food supply chain,” said Atradius.
“The fact we are in contact and receive management accounts of many food companies means we are able to continue to write limits and maintain an acceptable risk appetite.”
