In 2022, flexibility has become essential for food manufacturers formulating products with edible oils. Ongoing supply chain disruptions stemming from the pandemic, unfavorable growing conditions for key food crops, and Russia’s invasion of Ukraine have compelled manufacturers to seek alternative ingredients in response to emerging challenges. During Unilever’s first quarter earnings call in April 2022, the company reported that prices for edible oils like palm and soybean, which were already at the high end of their 10-year range, have surged since January. Unilever identified palm and palm kernel oils as significant cost drivers, spending approximately 2.5 billion euros ($2.62 billion) annually on these ingredients for products such as Knorr sauces and bouillon. The shift in global demand from sunflower seed to palm oil due to the conflict in Ukraine has further inflated palm oil prices, prompting Unilever to adapt.
CEO Alan Jope highlighted the company’s capability to adjust formulations to manage cost fluctuations, stating, “As supplies of sunflower oil have gotten really tight due to the situation in Ukraine, we’ve effectively switched to other oils like rapeseed oil.” More recently, Indonesia’s export ban on palm oil, the world’s largest supplier, has exacerbated supply and price pressures on both palm and soybean oils.
Joe Colyn, who oversees procurement and contract manufacturing at JPG Resources LLC, noted that the procurement landscape for edible oils has shifted dramatically. “Lead times and material availability are tightening across the board,” he said. “Previously, you could request more ingredients and receive them within ten days, but now lead times can stretch into months. If you haven’t finalized your product deals, you may find yourself in a difficult position.” Additionally, poor weather has delayed planting for many crops, complicating matters further. The USDA recently projected that global wheat stocks would hit a six-year low due to extreme weather and the ongoing conflict in Ukraine, impacting oilseed crops like rapeseed, known as canola in North America.
Colyn remarked, “Last year’s canola crop from Canada was somewhat constricted due to weather, and our planting season in North America has started slowly. Every day of delay in spring crop planting—corn, soybeans, canola—can reduce yields by half a percent or so.” These challenges have led consumer packaged goods (CPGs) companies to reassess their ingredient sourcing strategies. “Our guidance now is clear: if you can secure an ingredient, do it,” Colyn advised. “Price considerations have taken a backseat; it’s more about securing the materials needed to keep production running.”
This urgency to secure supplies has shifted sourcing strategies from consolidation to greater diversification. One of Colyn’s clients has identified 60 ingredients where they are sourcing alternative suppliers, recognizing the need for multiple sources rather than relying on single sourcing and just-in-time delivery. “This shift in strategy is crucial for companies relying on palm oil to consider their fallback options,” he noted.
For food manufacturers unable to obtain desired ingredients, substitutions have become a necessity, albeit a complex one. Larger CPGs often qualify their ingredient suppliers, which involves thorough quality and food safety checks. Switching to new suppliers can be a lengthy process, taking from weeks to several months. Furthermore, the feasibility of finding effective edible oil substitutes presents its own challenges. “Sometimes substitutions won’t be one-for-one, and flavor profiles may vary,” Colyn explained. “Different oils have varying functional temperatures and melt points, which can impact product transportation.”
For instance, canola or soybean oil can serve as substitutes for sunflower oil, while replacing palm oil in solid-fat applications, like cookies, is more complicated. “Butter could be an option, but some clients prefer to avoid animal products,” he noted. Changing labels to reflect substitutions adds another layer of complexity. Some brands have introduced labels that list multiple potential substitutes, such as “soybean and/or canola and/or cottonseed oil.” One JPG client currently uses “100% sunflower oil” on its labels, but they are preparing for future print runs with flexible wording to include alternatives.
JPG is advising clients that ingredient prices are unlikely to decrease in the near term and may continue to rise over the next 12-18 months. “We anticipate a return to more normal pricing perhaps by 2024,” Colyn stated. In the meantime, he encourages food manufacturers to secure their supply for the next six months. In Utz’s recent earnings call, CEO Dylan Lissette acknowledged significant cost increases in cooking oils and wheat. Though the company has about 80% of its supply secured for the year, it remains vigilant of market fluctuations.
For smaller companies, securing supply can be particularly challenging, as they compete with larger firms for limited ingredient resources. Vendors may prefer to work with bigger clients due to the simplicity of transactions. Colyn emphasized the importance for smaller brands to maintain clear communication with distributors, stating, “It’s vital to articulate your ingredient needs for the upcoming months and seek volume commitments.” Smaller companies can be just as proactive as larger ones.
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