We take a look at how sector-wide supply chain sentiment for food products has eroded over the past year and how it is impacting major companies in the industry, specifically Kellogg and General Mills.
COVID, inflation, and now war in Ukraine, supply chains have been stretched to the limit. To analyze this issue on our ESG Safeguard platform, we specifically zoom in on the food products sector examining how companies are reacting to supply chain issues and which ones are most vulnerable to emerging risk.
As major producers of wheat, Ukraine and Russia not being able to export due to war and sanctions leads us to expect a continued downward trend on supply chain sentiment for the industry.
Ukraine alone was expected to export 12% of the world’s wheat in 2022 to markets including the EU and Southeast Asia. The war will force companies to seriously consider how to offset these price impacts from other areas in their supply chains. Two companies that are especially vulnerable to future supply disruptions are Kellogg and General Mills, who both rely on wheat commodities, and have already low Supply Chain Sentiment for the past 365 days.
Kellogg Co. (K:US) has had issues with their supply chain since Q4 last year from labor strikes and equipment malfunctions. Last week, they made moves to improve resource efficiency in their MorningStar Farms brand by using a more environmentally friendly soy from Benson Hill, that will cut water and energy costs. This move could cut costs, but it is unclear if these actions will be enough to move the needle in the face of rising wheat prices. It will be interesting to see when and how the company will speak on this issue head-on. Still recovering production capacity from last year, the company has a steep climb ahead of them to right the ship.
Another company heavily reliant on grains, specifically wheat is General Mills (GIS:US). The company has been heavily focused on regenerative agriculture over the past few years as a method to reduce emissions and improve soil health. They recently had an update on this initiative and reiterated their goal to reduce emissions 30% by 2030. The reduction in emissions is a worthy goal, but the company doesn’t allude to any direct impact this will have on helping to reduce rising food costs. We expect discussion from the company on supply chain issues in the coming weeks, and perhaps during earnings calls.
We could single out any company in the chart above as “at risk” from a shrinking wheat supply, but on our platform, Kellogg and General Mills have the largest pre-existing risk when it comes to supply chains. Also, the fact that their main product of cereals relies on wheat production puts them at further risk. The companies have been busy reducing resource use and environmental impact, but we expect more of a clear discussion in upcoming earnings calls specifically when it comes to supply chain impact.
Can investors utilize ESG news sentiment to maximize alpha in the short and medium term between the intervals that are covered by ESG advisory firms, ratings agencies, and other peers? We investigated the relationship between short-term (weekly, monthly) and medium-term (quarterly) ESG news sentiment and stock returns. As the title suggests, our results indicate there is alpha, and we walked through the analysis. Watch it here.
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This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
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