What we’re hearing:
Processors are balancing rising costs with constrained pricing power
Processing and manufacturing businesses sit at one of the most operationally complex points in the agribusiness value chain.
They absorb pressure from almost every direction at once – rising farm gate costs, labour shortages, transport volatility, energy prices, packaging inputs, compliance obligations and customer pricing pressure – while still being expected to maintain output, quality, food safety and continuity.
Unlike other parts of the chain, processors typically have limited flexibility when it comes to passing costs through. Many are supplying major retailers, route trade, export customers or wholesalers who are operating in highly price-sensitive markets.
This creates a difficult commercial environment where profitability can quickly tighten, even when demand stays relatively stable. Businesses performing well are generally those with stronger discipline around margins, cash flow and production efficiency.
Matthew Beevers
“As a processor in the middle of the pipeline, you’re exposed to all the increased costs from upstream without always being able to pass them on downstream. Add to that the increasing cost of labour, packaging, machinery and general OPEX, it’s no wonder they’re feeling squeezed. Understanding opportunities and threats – and how to optimise margin outcomes – is critical at this point.”
The squeeze is not just one cost line
Food and beverage manufacturing remains highly energy-intensive, particularly across processing environments relying on refrigeration, heating, cooling, sterilisation and continuous production lines.
At the same time, employers are navigating labour shortages alongside a triple threat of regulatory changes, rising award rates, and more aggressive bargaining structures leading to higher labour costs and a direct impact on profitability.
On the production line, packaging has become another pressure point. Most processors are heavily reliant on imported plastics, resins, cardboard products and petrochemical-linked inputs. Supply continuity will be difficult to predict, so many businesses are keeping a close eye on procurement risks and supplier networks.
Simultaneously, many processors are facing higher farm gate input costs, increased freight charges, higher financing costs, and energy price volatility. It is this middle position that is keeping processing and manufacturing uniquely exposed.
Limited pricing power creates the real challenge
The strongest performing businesses will be those with high quality data and analytics, which enable them to understand at a granular level where they are making and losing money.
The most difficult challenge for many processors is uneven pricing power across the chain.
Transport providers may have rise-and-fall clauses which allow freight increases to be recovered through contracts. Processors supplying supermarkets don’t always have that same level of flexibility.
This becomes especially difficult in staple food categories. Where products such as milk, dairy, bread or packaged essentials are heavily price-sensitive, processors often have to absorb rising costs without being able to fully recover them downstream.
The recent supermarket inquiries and ongoing scrutiny around grocery pricing from the Australian Competition and Consumer Commission have also increased focus on supplier relationships and pricing practices across the food supply chain.
This is forcing many processors to become significantly more disciplined around:
- customer profitability
- margin analysis
- contract structure
- production allocation
- product mix
- working capital management
Value-add becomes a margin strategy
As pressure grows across lower margin products, many processors are shifting focus toward higher value production.
For example, in dairy processing this may involve greater expansion beyond plain milk into:
- flavoured milk
- yoghurt
- premium dairy products
- export-oriented specialty products
The same dynamic is occurring across meat, seafood, grain and packaged food manufacturing, where businesses are now looking at differentiated products that offer stronger margin potential. This is particularly relevant in export markets, where specialty Australian food products continue to attract strong demand and price premiums. Businesses that give greater attention to ESG, traceability and provenance are also better positioned to leverage these capabilities as differentiators in export markets.
Manufacturers are increasingly using scenario modelling to support these types of commercial decisions, particularly where there is exposure to concentrated export pathways or customer relationships. This may include modelling alternate markets, customer concentration risks, and product pricing outcomes.
Businesses can also use modelling to identify the impact of trading arrangements – such as where they are consistently paying suppliers early while customers are paying well beyond their trading terms. Because this can create unnecessary strain on working capital, modelling allows for testing around what changes to these processes could achieve.
Energy, water and resource sustainability
For processors and manufacturers, energy efficiency is both a cost management issue and a long term business strategy.
Governments across Australia are directing more support towards manufacturing investment tied to:
- electrification
- lower emission equipment
- energy efficiency
- infrastructure modernisation
Programs such as Western Australia’s Made in WA Energy Affordability Investment Program are designed to support businesses investing in equipment that improves energy affordability and reduces emissions intensity.
Like other current government initiatives, much of this support is structured around co-investment for growth rather than financing ‘business as usual’ operating expenditure.
Governments want businesses focussed on long term capability and transition, rather than using support measures to address day-to-day trading pressure.
In the broader energy landscape, water is another important consideration for processors – especially in regions where growing competition between agriculture, industry, mining and community demand is increasing pressure on water availability and pricing.
That exposure is pushing more businesses to assess water dependency and contingency planning as part of resilience discussions.
Technology investment moves from optional to operational
Many processors continue operating with disconnected systems across procurement, inventory, production, maintenance, finance, shipping and reporting.
This fragmentation, combined with overreliance on spreadsheets and manual processes, reduces agility when conditions change or the business needs to scale.
To address these risks and inefficiencies, integrated enterprise resource planning (ERP) systems are increasingly being implemented to improve:
- inventory visibility
- production costing
- procurement timing
- margin analysis
- customer profitability
- working capital visibility
- reporting speed
This is especially important in environments where even small inefficiencies can quickly erode profitability.
As an example, a multinational nut producer operating across 15 entities successfully used its ERP implementation to reduce reporting times from several weeks to a few hours. This has saved them a significant amount in labour costs while improving visibility across the group.
Additionally, technology investment is accelerating across robotics, automation, precision production, and quality monitoring. The goal is to enhance production economics, however these transitions are also improving workplace safety and retention, with experienced staff able to step away from repetitive tasks and into higher value work.
Cyber risk can stop the plant
As technology use expands, cybersecurity risks now unfortunately sit closer to day-to-day operations within processing and manufacturing environments.
Unlike sectors where cyber incidents mainly affect data or administration, processing facilities typically have highly connected technology systems controlling physical production processes.
As seen with the ransomware attack on meat processor JBS, this creates the potential for cyber incidents to:
- disrupt production
- affect cold storage
- interrupt logistics
- delay fulfilment
- create food safety risks
- impact upstream suppliers and downstream customers
Even short disruptions can have significant impacts. For processors, this means putting strong cyber resilience frameworks in place including backup procedures, system patching, MFA protocols, staff training, continuity planning, and manual fallback processes.
Outlook
Processing and manufacturing businesses remain central to the sustained competitiveness of Australian agribusiness.
Local producers continue to benefit from strong reputations around product quality, food safety, manufacturing
standards, and export capability. However, they are operating in an environment where cost pressures and production demands are rising simultaneously.
The businesses likely to perform best in coming years may not simply be the largest producers. They are more likely to be the operators capable of combining strong execution, value-add capability, production oversight and resilience in a market where margin pressure is unlikely to ease quickly.
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