This article first appeared in Forum, The Edge Malaysia Weekly on December 18, 2023 - December 24, 2023

Consumers, particularly in Southeast Asia, allocate a substantial portion of their annual income to food purchases. They spend about 30% to 45% of their annual income on food, much more than what consumers in the US and European Union (EU) do, which is about 10% to 15%. This means that even minor food price hikes place immense pressure on household budgets in Southeast Asia, leaving consumers vulnerable.

Global food prices have been especially volatile in recent years. Climate change and other major global events, such as the Covid-19 pandemic and the war in Ukraine, have heightened uncertainty in food markets. For example, food inflation has set in — food prices increased by 4.9% from July 2022 to July 2023 in the US and are expected to go up by 5.7% until June 2024. This impending surge in food prices exacerbates existing vulnerabilities, and the most significant impact will be borne by the two extremes of the food chain: consumers, as we have mentioned, and farmers.

Since mid-2021, farmers’ incomes have been volatile. Stark fluctuations in food prices have led to farmers’ incomes dropping by as much as half to surging by as much as double the baseline average of the last five years, jeopardising their livelihoods and undermining their ability to invest in sustainable agricultural practices.

Having a resilient supply chain can therefore be crucial. Typically, it would feature:

(i) A stockpile of key staples. These include rice, maize, vegetable oil and wheat. Using advanced analytics methodology, organisations could forecast prices and make stockpiles visible in trade flows. During Covid-19, for example, countries that imposed export restrictions and stockpiled key staples or tapped into reserves managed to stabilise their food prices.

(ii) Adequate substitutes for food items. For instance, cassava, which is more weather-resilient, could replace rice as a staple food in Southeast Asia. Thailand, Indonesia, Cambodia and Vietnam are already major global cassava producers.

(iii) Processed food with enhanced nutritional value. This can help reduce the quantity of food needed for a healthy diet. For example, the private sector has developed more nutritious food products by reducing the sugar, salt and fat content while increasing the amount of vegetables, fibre-rich grains, nuts, seeds and low-fat dairy. In Cambodia, the government launched a programme to introduce fortified rice to a national school feeding programme, which would give children more nutrition out of a portion of rice.

(iv) Less time spent in storage and transit. Start-up companies in Singapore and Indonesia are exploring farm-to-table e-commerce platforms, providing same-day delivery of fresh produce from remote rural areas. This helps to reduce the time that food spends in storage and transit, which translates into better customer satisfaction and loyalty, while reducing wastage and lowering fulfilment costs.

(v) Technologies that reduce food loss. Indonesia loses 20% of its harvested crops each year, while the Philippines loses up to 50%. Mechanical reapers and combines can shorten harvest time by 88 days, and advanced milling machines can improve the yield of milled rice by 65%.

(vi) Minimal consumer waste. A Singapore-US company has utilised silk proteins to preserve food and extend shelf life, enabling food to be stored and accessed for extended periods. Initiatives that push out food that otherwise would go to waste, say by selling visually imperfect produce at lower prices, result in food being more efficiently handled.

What do you need to build a food supply chain that is resilient? These elements are fundamental:

(i) A clear baseline. Creating and validating a robust baseline involves gathering comprehensive data on food safety risks and assessing them to establish performance metrics. Analysing scenarios that simulate potential disruptions to the food supply chain can help create the baseline, while benchmarking against industry standards through real-world testing and continuous stakeholder engagement validate it.

(ii) Advanced digitisation. Artificial intelligence (AI), big data and blockchain have made it possible to revolutionise the complete supply chain, potentially surmounting logistical challenges, enhancing freshness, bolstering food safety and security and elevating the overall customer experience. For example, McKinsey research with a sugar company showed that up to three percentage points in earnings before interest, taxes, depreciation and amortisation can be realised by digitising analytics-enabled decision-making. AI can also furnish real-time data for algorithms aimed at boosting agricultural efficiencies, increasing crop yields and reducing production costs. This, in turn, empowers food companies to improve their pricing strategies and to optimise inventory management.

(iii) A well-coordinated organisation. Stakeholders from across the entire value chain need to be on board — from farmers to processors, retailers and enablers such as telcos and logistical partners. A start-up in Nigeria, for instance, has initiated programmes that offer funding to farmers with very low interest rates in return for the right to trade all of the farmers’ yield. Some of the profit is given back to the farmers, providing them with income while ensuring the venture also makes a healthy margin.

By understanding the factors that are causing volatile food prices and implementing proactive measures, the food supply chain’s capacity to withstand disruptions will be strengthened, resulting in more stable and accessible food prices for all.

Nimal Manuel is a senior partner and Deepak S Moorthy is a senior vice-president at McKinsey & Co’s Kuala Lumpur office. Vu Nguyen is an associate at the Hanoi office.

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