Poor contracts to hit food manufacturers in the bread basket

Peter Bennett, head of food at Roythornes believes that UK food manufacturers could pay a significant price should they fail to include protective clauses in their supply chain contracts.

The crisis in Ukraine, often referred to as the ‘bread basket of Europe’ due to the country’s status as one of the world's biggest exporters of wheat and corn,  has resulted in sharp increases in price for the crops.

The rises are a result of farmers in the region holding back grain to protect themselves against the country's falling currency. As a consequence the price of wheat for delivery in May rose by as much as 5.9% to £3.81 a bushel on the Chicago Board of Trade – the biggest rise for almost 18 months. Corn for delivery in May rose by up to 3.7% to a six-month high of £2.89.

These fluctuations in the price and availability of some foods and ingredients mean that manufacturers will struggle to fulfil orders profitably, if they manage to deliver at all, should large amounts of produce be held back.

Price hikes like these highlight the need for food manufacturers to protect themselves contractually, and this is becoming a prevalent issue in the UK.

The impact of price increases and reduced produce availability, however minor they may seem on paper, can pose serious problems for the food supply chain. Put simply, if manufacturers don’t get their ingredients they are not able to make the food, and increasing ingredient costs reduce already squeezed margins.

This raises serious issues for the industry exacerbated by the reluctance of retailers to alter pricing. The result is greater pressure on the manufacturers who will now be looking to build flexibility and clauses into contracts that allow them some leeway when it comes to delivery volumes and lead times.

In the UK, the problem will only grow in the coming years as flooding heightens the problems faced by farmers.”

The National Farmers Union, has produced evidence showing that 58% of England's most productive farmland lies within a floodplain. Defra estimates that 35,000 hectares of high-quality horticultural and arable land will be flooded at least once every three years by the 2020s. This could rise to around 130,000 hectares by the 2080s if there is no change to current flood defence provision.

Flood waters pose numerous risks to livestock, including spoiling animal feed, killing vegetation used for grazing and feed production and depositing harmful chemicals and bacteria on fields. The end result of which is shrinking herds in poor health and the coinciding shortages in produce.

With this in mind, the medium and long-term impact of flooding will cause issues for manufacturers operating in the UK should they fail to protect themselves and provide for shortages in produce and ingredients.

As contracts come up for renewal, all parties will be looking for additional flexibility and it will be up to the suppliers and their customers to decide the extent of any leeway they need.

At Roythornes, we have created a list of ‘top tips’ for negotiating supply contracts in relation to product and ingredient shortages:

  • Manufacturers should try to negotiate leeway in delivery schedules, including suspending deliveries entirely, for unforeseen circumstances such as floods and other natural disasters or even for wars and civil disobedience. Consideration should be made for the events which might affect the countries or areas being worked in or ordered from and there should be clarity in contracts as to what the relevant events might be. It is important to act reasonably irrelevant of fault.
  • Be aware that all suppliers will be in the same position and try to come to an agreed and workable solution. Bear in mind hat all parties will want to limit their liability in the same way that manufacturers will want to limit its liability to its customers.
  • If a company is contracted to supply an ingredient, cannot do so, and wants to source from elsewhere, it needs to make it clear in the contract that this is an option. (Bearing in mind traceability and quality control issues).  Assurances that the third party can deliver in time should be made.
  • Good communication channels are a must – if there are shortage issues they should be communicated down the entire supply chain as soon as possible.

For more information about our services please visit our food sector page.

If you would like to find out more, speak to Peter Bennett, head of our Food team on 01775 842567.