When it comes to sourcing edible oils for food products in 2022, flexibility is the name of the game. The combination of lingering supply chain friction from the pandemic, poor growing conditions for key food crops and Russia’s invasion of Ukraine have put manufacturers on the offensive, sending them to seek out alternatives for popular ingredients as the latest challenge erupts.
In its first quarter 2022 earnings call this past April, Unilever noted that prices for edible oils such as palm and soybean, which were already sitting on the upper end of the 10-year range, have only accelerated since January. The food giant describes palm and palm kernel oils as one of its biggest cost items, and spends 2.5 billion euros ($2.62 billion) annually on the ingredients alone, for products including Knorr sauces and bouillon.
Unilever said that as global demand switched from sunflower seed to palm oil because of the war in Ukraine, palm oil's price rose in response. So Unilever made adjustments.
"One of the things Unilever's good at is flexing our formulations so that we can take advantage of differential cost increases," CEO Alan Jope said during the call. "As supplies of sunflower oil have got really tight from the Ukraine, we've been able to switch to other oils like rapeseed oil quite effectively."
More recently, the decision by Indonesia, the world’s largest supplier of palm oil, to temporarily impose an export ban, had pressured supply and prices of the edible oil as well as soybean oil, a popular alternative.
The result is a new normal for edible oil procurement, said Joe Colyn, who oversees procurement and contract manufacturing at JPG Resources LLC, a firm that helps businesses from Fortune 500 food giants to startups with product development and supply chain management.
“The lead times and the availability of materials across the board seems to be tightening,” said Colyn. “Historically, you could call up and say, ‘I need more stuff’ — in 10 days, you could get it. Now lead times just continue to extend into months sometimes. If you haven't made the deal for your product, you might be out of luck.”
Delayed planting for many crops this year because of poor weather conditions is also adding to the complexity. The USDA recently projected that global stocks of wheat will fall to a six-year low in part because of extreme weather in key growing countries, as well as the impact of the Ukraine conflict. It’s a dynamic playing out in oilseed crops such as rapeseed, which is known as canola in North America.
“Last year's crop out of Canada was a little tight because of weather,” Colyn said. Canada is the top global producer of canola. “And then in North America here, our season is off to a really slow start. … Every day that we delay planting for spring crops — corn, soybeans, canola — you start to impact your yield by half a percent or something like that,” he said.
This hurricane of factors has reshuffled CPGs’ ingredient purchasing considerations.
“The guidance that we're giving right now is that if you can get it, you get it,” Colyn said. “You talk about price, but price is maybe not the driver in the market right now. It's a matter of can you get the materials you need to get the plant running.”
Finding a fallback position
This pressure to nail down supply has also forced a change in sourcing strategy from the more recent trend of consolidation to greater diversification. Colyn said one client has a suite of 60 ingredients for which it is seeking alternate supplies.
“They spent the last 15 years driving towards single sourcing and just-in-time delivery, and now they realize they need multiple sources, maybe even holding some inventory on some of these,” Colyn said. “It's just a whole different dynamic. That would cascade back to anybody that's using palm oil, thinking, ‘What's my fallback position?’”
For food manufacturers who can’t secure the desired ingredient, substitution is becoming a fact of life — albeit a complicated one.
Larger consumer packaged goods companies (CPGs) like Kellogg or Kraft Heinz typically qualify their ingredient suppliers, including confirming their quality and food safety standards. As they switch to a new supplier, that process can become arduous because of the numerous quality checks, Colyn said, and take anywhere from a few weeks to up to six months.
“The guidance that we're giving right now is that if you can get it, you get it. You talk about price, but price is maybe not the driver in the market right now. It's a matter of can you get the materials you need to get the plant running.”
Business partner, procurement, JPG Resources
Then there is the calculus of finding the best edible oil substitute.
“Sometimes you can make a substitution but it won't be a one-for-one substitution, or the flavor profiles are just slightly different,” Colyn said. “The oils [have different] functional temperatures, melt points, and what does that mean for your product as you're transporting it? … There's a lot of technical elements that play into some of these substitutions.”
For example, canola or soy could be substituted for sunflower oil, since they are both liquid oils and are functionally similar, Colyn said. Substituting for palm in an application like a cookie, where a solid fat would be required, would prove more complex. "Butter could be used, but the client may not want animal products in the food," he said.
Changing labeling is another challenge. To cover any substitutions, some brands have produced labels that will list a range of potential substitutions, using phrasing like “soybean and/or canola and/or cottonseed oil” in ingredient lists, Colyn said. He described one JPG client that uses “100% sunflower oil” on its labels. While it had secured enough supply of the oil to last for the next few months, the company is preparing for its next label print run.
“They are validating soybean and looking at one other oil right now,” Colyn said. “But their thinking is that their label is going to have to read something like that — sunflower and/or soybean and/or canola. That way they have themselves covered in the event that they have to go to one of those other oils.”
JPG is telling its clients that ingredient prices are not likely to back off for the rest of the year. “We still see some inflation spiking over the next 12-18 months. … Maybe by 2024 we're back to a little bit more of a normal world,” Colyn said.
In the meantime, he advises food manufacturers to nail down their future supply for the next six months.
In Utz’s first quarter 2022 earnings call this past week, CEO Dylan Lissette described the “step up” in costs as “significant” in cooking oils and wheat. The company has about 80% of its supply covered for the remainder of the year, he noted, although price is another consideration.
“We are being careful in watching the market and there are nuances in contracts where we have the supply covered, but the price is locked within the range, but we don't have a final price yet,” Lissette said.
For smaller companies, locking down supply may be more difficult, since they are competing with big players for the same finite amount of ingredients. A vendor may even be willing to lose a small customer because of “the simplicity” of doing business with a bigger firm, Colyn said.
“It's important for smaller brands to keep a good line of sight into their distributors to say, 'I do need this oil and I'm going to need this much oil for x number of months. Can you give me a volume commitment?’" Colyn said. “A small company can be as proactive as a large one.”