External influences affecting food prices

by Business Case Studies on Tuesday 27th May, 2008

External influences affecting food prices

External influences – economic, technological and even climatic – can affect production in industry, for example, food crops harvested for the production of biofuels. The effects of unfavourable climate conditions on crop growing coupled with a rising demand from developing countries has contributed to food shortages and higher prices.

Food prices are rising worldwide. A top level report compiled by the United Nations and the OECD (Organisation for Economic and Co-operative Development) predicts that food prices could remain at record levels until 2017. The report said that droughts, poor harvests, low stocks and a growing demand were to blame for price rises. (The Times, 23 May 2008)

The demand for wheat and coarse grains (cereals other than wheat and rice) was nearly twice the rate of production, due in part to the demand from developing countries. From 2005 to 2007, demand for wheat and coarse grains grew at nearly twice the rate of production, with more than half the increase of both cereals and vegetable oils attributable to the biofuels industry. The UN OECD report called for a co-ordinated relief effort to help developing countries and for a review of the growing use of biofuels. (The Times, 23 May 2008)

A Food and Agriculture Organisation (FAO) report says that production has responded fast and it is expected that rice, wheat, corn and other coarse grains production will be higher this year. However, increased production of coarse grains will be outstripped by rising demand due to the use of corn to make biofuel. The use of crops, land and other agricultural resources to make biofuels will be one of the subjects on the agenda of a world food crisis summit hosted by the FAO in Rome early in June. The FAO Food Outlook report in the news today said collective international action was needed now to develop agriculture and fight hunger.

See two Times 100 case studies of companies that use food crops as their raw materials:

  1. The first case study shows how McCain, in a fast-changing external environment, needs to identify the likely impacts of such changes on its business. A company's ability to meet its objectives depends on two main groups of factors – the internal strengths of the organisation (for example being able to make the right products in an efficient way) and being able to identify external influences in the business environment and on its consumers and adapt accordingly.
  2. The second case study focused on Kellogg looks at how aims and objectives help to create a strategy to give Kellogg a unique position in the minds of its consumers. In preparing a strategy, Kellogg needs to be clear about what it wants to achieve. It also needs to know how it is going to turn desires into reality in the face of intense competition. Setting clear and specific aims and objectives is vital for a business to compete.

Sources:

The Times Online – No quick fix for escalating food prices, Alistair Darling told, 23 May 2008

The Times 100 Edition 12 Case Studies – Kellogg's, Using aims and objectives to create a business strategy

The Times 100 Edition 12 Case Studies – McCain, How McCain responds to changes in the external environment

Potential Study Questions:

  • Give two examples of how technology provides opportunities for businesses and two examples of how technology can be a threat to them.
  • The legal environment also affects businesses – give two examples.
  • Analyse what possible impacts the current demand for food crops might have on the two companies above.

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