Small food and drink producers are being urged to enhance their risk mitigation processes in a sector report by trade credit insurer Atradius.

The Food Market Monitor by Atradius reports that with more than 45% of food consumed in the UK imported, exchange rate volatility and its impact on the cost of commodities and food items remains a key issue facing many British food producers and processors who are reliant on imports.

In the report, available for free download at www.atradius.co.uk, Atradius warns that the added risk for many SMEs is often a lack the resource to effectively manage risk mitigation with forward contracts and currency hedging.

While sterling has seen a recent rebound, any positive affect is likely to be limited as many businesses are bound by contracted prices agreed at lower sterling exchange rates.

Looking at a wider picture, the Market Monitor highlights value added growth in the British food and beverages sector is forecast to have grown 2.5% in 2019, with a further 1.6% expansion in 2020. However, input costs for food businesses remain high with any opportunity to pass on price increases to retailers limited.

Consolidation in the retail segment and the increasing market success of discounters, which puts traditional retailers and pricing under pressure, weigh heavily all along the supply chain.

The Market Monitor goes on to warn that profit margins of British food businesses deteriorated in 2019, and the trend is expected to continue in 2020. Despite an increase in real incomes, UK consumers remain price sensitive. In 2019, food producers and processors have continued to pursue mergers and acquisitions to increase leverage in price negotiations with major retailers as well as to diversify the offering.

Atradius reports payments in the British food sector take between 45 to 60 days with some larger players pushing the supply chain on even longer terms. Due to an inability to absorb higher input costs and increased pressure on margins, the number of payment delays and level of insolvencies increased in 2019 and Atradius economists expect this negative trend to continue this year with an 8% rise in failures.