BRICs and beyond: Currency controls leave Venezuelan food sector in crisis
Shortages of US$ leave imports dwindling
Food manufacturers based in Venezuela have long struggled to supply the country's oil-fuelled economy amidst strict government controls and shortages of many key industry inputs. And recent changes to the country's currency regime could - say analysts and business leaders - intensify existing problems in the industry. Andrew Rosati reports.
The last decade's surging crude oil prices saw Venezuela spending petrodollars on imports that expanded its packaged food market dramatically. International research group Euromonitor estimates that the sector grew from US$1.67bn in 2004 to over US$19bn last year.
This demand has largely been met by imports of finished goods. National industry and services association Consecomercio says about 70% of products consumed in Venezuela are imported or simply assembled from raw material shipped from abroad. Venezuela's national statistics institute (Instituto Nacional de Estadística de Venezuela) reveals food and agriculture imports surged from nearly US$1.8bn in 1998, to more than US$8bn in 2012 - the most recent data available.
Local manufacturers have struggled to compete, and now - with Venezuela's economy currently in decline - its position is worsening amidst price and currency controls that are increasing in complexity. Companies need hard currency (US dollars) to buy key ingredients and equipment and the required volume of greenbacks are not available through the government's rigid exchange controls.
After months of struggles, food giant Empresas Polar, the largest privately-held company in Venezuela, closed a pasta plant in April due to delays in payments of foreign currency.
"[Government authorities] have been alerted in a timely and responsible manner about the risks of delaying the release of foreign currency to pay our debts with our suppliers, and the effects on the production of an item that is part of the basic diet of Venezuelans," the company said in statement.
In January, Polar said had it paid for US$463m's worth of hard currency - but the money has not arrived from the government-run exchanges.
And Polar is not alone in its troubles, says Carlos Machado, a professor at the Institute for Superior Administrative Studies (IESA) in Caracas and coordinator of the college's agribusiness programme.
"All food companies in the country are having serious difficulties obtaining foreign currency for raw materials, containers and processed products," he explains.
The National Association of Cheese Industries (Aniquesos) has warned that its companies' packaging inventories will soon be exhausted, leading them to discontinue production. Similarly, the Venezuelan Chamber of Packaging (Cavenvase) said the production of aluminum and glass containers is paralysed due to a lack of US dollars. The government failed to fulfil a promise to deliver almost US$28bn to companies by the end of last year - the latest available data - according to Caracas-based consultancy Ecoanalítica.
The government has tried to take action to ease these problems. In March the authorities introduced a new currency market, effectively weakening the Venezuelan Bolívar (VEF) by more than 80% against the US dollar for many imports. But while the move could free up hard currency for some cash strapped businesses, fears are growing that one of the world's highest inflation rates - over 57% - will soar even higher.
This is a serious problem given that the food sector is subject to price controls. Former president Hugo Chávez, who died in March 2013, capped the price of many staple goods - such as milk, meats and flour. The government recently loosened some of these controls but analysts say permitted prices do not cover the costs of production.
"Not only are companies going to struggle to cover their costs," Rodrigo Agudo, a private consultant and former head of the Venezuelan Chamber of Dairy Industries, comments. "But if they're allowed to raise their products' prices to do so, the general public won't be able [to] afford them."
And while the government has insisted that the old fixed rate of VEF6.3 per US dollar will be maintained for food imports, it is not clear in practice how much of this cheaper hard currency is available or whether companies will use the new complimentary exchanges (where US dollars trade for around VEF10 and VEF50 respectively).
Such practices have severe consequences for local manufacturers, says Otto Gómez, the executive director of the Venezuelan Meat Council (Convecar), a trade group. "When you have a product whose cost doesn't fall within the government established margins, it's preferable not to sell it altogether."
While consumption has indeed increased, Gómez, who formerly headed the National Association of Supermarkets and Self-service Chains (Ansa), laments private Venezuelan manufacturers have failed to compete with a flood of finished product imports during the petro bonanza. He says that many brands scaled back operations or simply packed up shop.
With the Venezuelan economy is now in tatters, many worry it may now take more than just dollars to revive the national food sector. "After years of cutting costs it's not just a matter lacking inputs," Gómez says. "Many companies require serious investments to produce at capacity again."
Other commentators believe more structural changes are required.
Agudo, who also coordinates the Venezuela political opposition's food commission, says serious dialogue is needed between regulators and the private sectors to jump start production levels. "The first step is for the government to admit their food policies have failed," he insists. "Until they do that, many are going to go hungry."
With a number of food makers - notably international players - and the Venezuelan authorities themselves remaining reticent on the issue, whether such a dialogue could be established seems doubtful.
Overseas food industry players were reluctant to comment about Venezuela's problems. Representatives from General Mills, Heinz, Plumrose, as well as the Venezuelan Chamber of the Food Industry (Cavidea) declined to comment. Requests for comment from other major companies serving Venezuela - Cargill, Nestlé and Mondelez International - did not yield replies.
Sectors: Baby food, Bakery, Canned food, Cereal, Chilled foods, Commodities & ingredients, Condiments, dressings & sauces, Confectionery, Dairy, Dried foods, Emerging markets, Fresh produce, Frozen, Ice cream, Meat & poultry, Seafood, Snacks, World foods
- Rise of prepared foods in US grocers - analysis
- Hershey results, outlook, M&A - the top takeaways
- How are brands organising for e-commerce?
- Work on sugar could stir more clean-label concerns
- Free-from firm BFree Foods - bitesize interview
- Fazer buys European biscuit brands from Mondelez
- Murray Goulburn accused of "misleading" the market
- Mondelez sees stronger margins, LFL growth
- ConAgra sells two bakeries to Alpha Baking
- ABF takes Patak's into frozen ready meals category