The food industry is one of those rare ones that is constantly growing and developing year after year. As a company in the food production chain, “LJLinen” has also felt this for many years. An indicator of this is the almost endless opportunities for business growth, not only here in Europe, but all over the world, especially in developing countries, where the demand for quality products and food products in general is growing particularly fast. At the same time, the last few years have been like a cold shower for those working in the food industry.
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The globalization of production and the specialization of certain regions and countries, which worked as a well-oiled mechanism for decades, have become a stumbling block for many companies and industries in the current conditions.
The shadow side of globalization and specialization
Business chains of raw materials, resources and products that operate on a global scale have many advantages – the ability to optimize production costs, the promotion of global development and wide choices for the end consumer are just some of them. Countries around the world have become dependent on each other. At the same time, globalization has taken place at such a fast pace in recent years that the process has gone somewhat in the opposite direction, that is, it can be observed that specific countries or regions have specialized in the supply of specific products or raw materials. For example, China is known as a manufacturer of microchips, Ukraine as a grain supplier, Germany as a machine-building superpower. From the point of view of production, such specialization allows companies to reduce costs, and it is also facilitated by the peculiarities of the availability of resources and labor. However, only now, when the world has been hit by two events of global impact – the pandemic and the war in Ukraine, companies and countries are beginning to experience the other side of the coin of globalization and specialization.
What will we do if the only factory fails?
If the pandemic and Russian invasion of Ukraine would happen half a century ago, the manufacturing companies would hardly be in the same situation as they are now: business was more local, supply chains were shorter and were often carried out within the same region. But right now, we depend on each other. During the last half century, there have been no such events in the world that would make business to be evaluated from any aspect other than the economic one. All these years we have been thinking about how to produce more cheaply and more. But now we are forced to think and see what happens when the only factory where we manufacture a product or product components stops working.
Faced with raw material shortages, the impact of sanctions and disrupted supply chains, it’s clear that risk diversification is something any business should think about, and the food industry is no exception. Unfortunately, we clearly see what happens to food prices and in some cases to the availability of certain products, when a third of the food or some raw material comes from one particular region or country. Risks in the food sector are also increasingly caused by climatic conditions, for example, prolonged heat waves in a European region, such as here in Eastern Europe or France, could severely affect grain yields, and the world would once again face a new crisis. At a time when Russia is sanctioned for its aggression, while Ukraine is embroiled in a bloody conflict, these lessons are felt not only by Europe, but also by other regions of the world.
Western Europe is starting to look towards Africa?
The stability of the food industry depends on both production and the availability of raw materials. So it is important both where we produce, from which countries and regions we buy raw materials and what is grown there in general. European food production has historically moved further and further south from old Europe. For many years, Spain has been a large food producer, but now we see a trend that many food producers are starting to look even further and move production, for example, across the Mediterranean Sea to North Africa. So far, these have mostly been steps motivated by climate and economic considerations. However, now it is valuable to think about the transfer of production and cultivation of food raw materials to Africa or other regions also from the point of view of food security. A number of European food producers are already looking at Africa as the new breadbasket of Europe.
The main obstacles: corruption and instability
Of course, one must be aware that there can also be significant obstacles to manufacturing, agriculture and livestock in Africa, the most common of which are corruption and political instability. At the same time, as a company that has been successfully building supply and logistics chains for food and feed raw materials in African countries for many years, we can say that the benefits generally outweigh the risks. The most important of them are the climatic advantages that open up opportunities for farmers to harvest even several times in a season, and the wide prospects of cost optimization, which is important in production. Also, Africa, as a less developed region of the world, offers opportunities to grow with it. Namely, food producers have the opportunity to introduce products and product groups in this market that are traditionally and historically not represented there, thus opening up the opportunity to win a dominant position in the market.
Risk diversification for companies can unfortunately mean higher expenses and upfront investment, which is hardly a popular message in the current climate. Therefore, it is important that companies are also motivated by political decisions. A good example in this regard is the Netherlands, where a series of national programs already motivates entrepreneurs to produce in African countries. However, it is important to address these issues not only at the national level, but also at the European Union level. Support programs, state missions and favorable legislation are tools that can make the road to Africa easier for entrepreneurs and help establish contacts with African countries also at the political level.
Western European countries are gearing up, will we be left behind?
At the moment, it can be observed that large Western European agricultural corporations are increasingly interested in Africa’s perspective in agriculture, animal husbandry and food production. Knowing how knowledgeable and capable Latvian farmers are, who produce food raw materials at an almost scientific level, it would be a shame if we did not think about using this opportunity as well.
An additional argument for entrepreneurs and farmers to look beyond the borders of Europe is certainly the fact that, despite the initial investments, the diversification of risks, fortunately, does not mean that production will be expensive in the long term as well. For example, growing crops outside of Ukraine, for example in one of the African countries, would initially be probably 20-30% more expensive. However, the more intensive the production and the better it is possible to optimize the processes, the more the expenses even out. At the same time, it is clear that the long-term winners will definitely be those who will build their business strategically and be ready for “X hour”, which can be both natural disasters and political instability in a country, war or sanctions.
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