Global food parallels oil refining
July 31, 2012
The temptation may be great in some quarters to compare the current situation ruling in the food industry with what is happening in the global energy business. Before delving into the forces explaining this analysis, it is important to appreciate the fundamental differences between these two behemoths. While developments in both are affected by the exceptional volatility of their basic raw material, like grains in the case of grain-based foods, and oil, for energy, great gaps also rule. Nothing underscores this better than oil being a natural raw material with a limited supply while wheat and other grains have a supply that is determined by farmers’ planting decisions and weather conditions that are unlike anything affecting energy.
Yet, even after recognizing these distinctions on the supply side, which are equaled if not exceeded in how demand is different, the relevance for comparing refining with food still stands. In energy, especially in making oil into gasoline, the shifts under way are striking. Most telling is the closing of oil refineries in parts of the developed world, notably along the East coast of the United States. Estimates that half of the East coast U.S. refining capacity is about to be shut down reflects poor returns due to crude oil prices and stagnation in consumption of gasoline. Governmental emphasis on development of alternative energy sources to oil and gasoline has speeded up decisions initially prompted by recognizing that the uncertain state of the western economy caps gasoline use if not putting a crimp into consumption.
Finding parallels to energy in the food industry is easy. Rising prices of wheat and other grains caused advances in retail food prices that are seen as producing much greater caution in purchases than seen before or even envisioned as possible. This created the situation pressuring margins of food manufacturers. Unit sales of branded food that at one time might have been viewed as highly resistant to such forces have declined. Compared to refinery shutdowns, the food industry has not experienced anything similar. The essential standing of food is more fundamental than is the case for gasoline, and this has been a safeguard against a comparable setback in food. Yet, that undergirding is being challenged by the broad attacks on foods considered unhealthy or sources of excess calories that lead to obesity.
How the oil and refining industry is reacting to the current environment has parallels that thus far apply in a limited fashion to the food business. Just as refining capacity has closed in response to reduced gasoline demand in North America and Europe, it has expanded in the emerging economies. The International Energy Agency, analyzing the impact of the financial crisis beginning in 2008, estimated that 3 million barrels of daily refinery capacity have closed in developed nations, while emerging nations have added 4.2 million barrels.
So far as the food industry is concerned, it is difficult to identify any instance where reaction to market difficulties has prompted anything like what has happened in energy. The best safeguard the food industry has to counter the forces that have decimated oil refiners is introducing plant and product innovations that not only reverse pressure on margins when sales are not growing, but also allow pricing flexibility. Nothing is more important than maintaining modern plants as well as assuring that food facilities are strategically located to benefit from good locations for obtaining raw materials as well as to serve market potential. Much of the refining industry that is under pressure and may be closed if present conditions continue comprise plants that are not judged to have the latest technology, and their locations, while near to East coast population centers, have costly corridors for taking in oil. As massive, as financially strong and as nimble as the refining industry is credited with being, on balance the food industry has done a superior job of reacting to quite similar difficulties.