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Risk Management
Published  8 MIN READ

A Piece of Cake: Unwrapping the Financial Risk of Food Products

As the economy grapples with higher prices for almost everything, one can look at this year’s super cycle across all commodities as a significant factor to sticker shock in the food aisles. According to the US Labor Department, in October consumer prices in North America rose by the most in 30 years. But where the consumer sees a food product and thinks: nourishment, treat, value for money, or ‘healthiness’, the food manufacturer’s perspective is much more complex.

Beyond considering the product’s customer appeal, the manufacturer’s thinking must also entail commodity prices and correlations, optimal manufacturing choices and downside margin protection. Or at least it should, if they want to manage risk effectively. Higher raw material and ingredient costs are now taking a bigger bite out of its profit margins, because with increasing competition, there is a limit to passing costs onto the consumer.

Next time you’re strolling the aisles of your  supermarket, take a moment to pick up a packaged item from the shelf and study its ingredients. For a change, look beyond the calorie content and simply add up how many individual ingredients are listed. If the item you’re looking at happens to be a processed product, chances are the list runs a lot longer than you might have expected.

There will likely be a handful of everyday ingredients such as flour, eggs and water, for instance. But there will also probably be mention of many other, less familiar, ingredients. Maybe a pinch of sodium acid pyrophosphate, which helps baked goods rise, but also prevents potatoes from darkening, or a dash of sodium stearoyl lactylate, which helps stabilise emulsions – suspensions of oil in another liquid; think mayonnaise. So far, so good. But now, what if you discovered that the item in your hands had doubled in price from when you last purchased it? You may well put it back on the shelf faster than you could say “partially hydrogenated soybean oil” (a common shortening ingredient).