Perspective

on Inflation
in Consumer
Overview document
December 2021

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company
is strictly prohibited

Inflation is challenging Consumer P&Ls
1 2
This inflationary context has never
been seen before
CPG players have experienced historic rises in
labor, freight, and commodities over the past few
months. This is a blend of cyclical (question of
where are in the cycle), structural (costs will be
elevated for multiple years and may never revert),
and global supply disruptions (supply chain
limitations creating near-term price shocks). Every
commodity has a slightly different story, but in no
case are headwinds receding quickly
Inflation is just one of the many challenges right
now, stacked on top of employee safety, service
challenges, workforce retention and many others,
with no clear end in sight. On top of this, re-
energizing an exhausted workforce that has been in
crisis mode for the past 18 months is a top priority
for driving any action
Awareness of supply chain challenges has created
a significant increase of receptiveness from
suppliers, customers, and consumers to changing
paradigms
CPG companies are taking actions to
offset the cost-price squeeze
 Three themes are consistently emerging in
response to inflation:
 Maintain relentless focus on execution.
Focus on “winning the day” through cross-
functional war rooms driving faster decisions and
feedback loops; double down on operational
excellence with performance management
 Accelerate digital, analytics, and automation.
Bring full set of data to bear to manage the
increasing complexity of the supply chain; bring
forward timelines for physical automation
projects in both manufacturing and logistics, and
test assumptions on cases ‘out of the money’
 Future-proof for resilience and sustainability.
Rethink the network configuration to build
appropriate buffers to ensure resilience.
Evaluate the capabilities of the future across the
business to ensure right talent in place
Macroeconomic context
3
Navigating this environment requires a
bold and comprehensive approach
 Develop an end-to-end view on the full suite
actions that can be taken to offset inflation
headwinds, pushing beyond the traditional sources
of value
 Defining the approach for change, balancing the
need for impact with the disruption the organization
can tolerate. Understanding what’s a must-do-now
vs. a prepare-for-later action, and using that to
build the path forward
 Exciting and organizing your people around this
next challenge. Involving the full workforce in this
effort, and engaging them around a shared vision
McKinsey & Company 2
 Macroeconomic Context

9 GDP scenarios modeled; moderate to strong GDP growth likely

due to mostly effective public health & economic interventions
GDP scenarios for the economic impact of the COVID-19 pandemic
Details follow

’20 Q3 ’22 Q4
Effective control of virus B1 A3 A4
health impact
Strong public health response
succeeds in minimizing health impact
within 2-3 months and then
Contained health impact / but sector Contained health impact / strong growth Contained health impact / rapid and strong
maintaining control
damage and lower long-term growth rebound and recovery growth rebound and recovery
Virus Health Impact
& Public Health Effective response, but (regional) B2 A1 A2
Response recurring adverse health impact
Initial public health response generally
Effectiveness of the succeeds but localized increases in
public health response health impact occur periodically
Recurring health impact / slow long-term Recurring health impact / slower near-term Recurring health impact / strong growth
in controlling the health requiring ongoing intervention
growth insufficient to deliver full recovery growth and time to recovery rebound and recovery
impact of COVID-19
Material failure of public health
interventions
B3 B4 B5
Response fails to prevent sustained
high levels of health impact that may
wax and wane, potentially rolling into High levels of health impact / prolonged High levels of health impact / slower near- High levels of health impact / delayed but
2022 downturn without foreseeable recovery term growth and delayed recovery strong growth rebound and recovery

Ineffective economic interventions Partially effective economic interventions Highly effective economic interventions
Self-reinforcing recession dynamics kick-in; Policy responses partially offset economic Strong policy responses prevent structural
widespread bankruptcies and credit defaults; damage; banking crisis damage; recovery to pre-crisis fundamentals
potential banking crisis is avoided; recovery levels muted and momentum

Knock-on Effects & Economic Policy Response

Speed and strength of recovery depends on whether policy moves can mitigate self-reinforcing recessionary dynamics (e.g., corporate
defaults, credit crunch)

McKinsey & Company 3

 Macroeconomic context

Consumer price inflation outlook suggests

continued pressure for coming years
US price outlook
12-mo. change 18-mo change annualized A2 Prosperity A2 Base A1 Limited

Change in core Consumer Price Index (CPI)

Percent, through Q4 2026
7.0 CPI scenarios here are
Historical Projected future
scenarios outcomes of McKinsey
6.0
macroeconomic modeling
5.0
Other data points (e.g.,
4.0
Goldman) are even more
bullish, with sustained
3.0 increases of 4-5% through
2.0
’22, driven by supply-
constrained categories
1.0
While timing and severity will
0 vary by model, there is near
unanimous consensus of
-1.0 significant inflation being
-2.0
part of our landscape for
2015 16 17 18 19 20 21 22 23 24 25 26 the next few years
1. Note: A2 limited scenario was not considered due to similar nature to A1 scenarios. A1 base case was not considered due to similar long term trends to A2
base case scenario. A1 prosperity was not considered due to similar long term trend to A2 scenarios.

SOURCE: BLS, McKinsey analysis McKinsey & Company 4


Today’s inflationary environment is a combination of cyclical,
structural, and supply chain issues
1 2
Labor
 Overall, companies are
experiencing labor shortages (esp.
in manufacturing and
transportation), even as
customer/consumer demand revert
to normal
 Wages have increased, driven by
the outflow of workforce from low-
wage occupations, increasing
unemployment. Expectations
suggest some level of reversion to
historic norms, but systemic issues
(e.g., changes in types of jobs
required, changes in mindset
towards work, relocations and early
retirement) will have a longer
lasting impact on labor supply.
Inflation driver
Freight
Observations
 Rising US freight rates have been driven by
both COVID-related supply shortages
(shortages in trucking capacity, surge in freight
demand) as well as long-term structural effects
(higher freight operational and maintenance
costs, aging highways, etc.)
 Spot freight rates up 40-60%, contract rates up
15%. Contract rates expected to continue rising
3-6% p.a. over next 5-10 years as structural
shortage of trucking capacity persists
 Continued shortages in truck drivers, upsurge
in freight demand post-COVID and structural
inefficiencies likely indicate continued
heightened freight rates
 Ocean freight rates up 300-600%, driven by
acute shortage of freight capacity as cargo
vessels and containers are stranded in
congested ports or ports temporarily closed
due to COVID outbreaks. Shortage expected to
end by Q1/22
More detail by inflation driver in the appendix
Macroeconomic context
3 4
Agricultural commodities Hard commodities
 Row crop prices (corn, soybeans,  Recent commodity increases are
wheat) have spiked in 2021, driven unevenly distributed, suggesting
by combination of demand shock isolated supply disruptions is the
from China rebuilding swine herd main driver of price spikes (not
after African Swine Fever, as well broad based demand surge)
as a series of weather events (e.g.  Most factors driving inflations are
Brazil/Argentinian draughts). considered temporary, with prices
Neither is sustainable, suggesting expected to start trending
prices will return to marginal cost. downwards
However, marginal cost likely to
 However, increasing energy prices
increase ~5% due to current price
due to OPEC’s policy and logistics
spikes
costs could add to marginal cost
 Row crop prices could remain and thus longer term price
elevated longer if China rebuilds
swine heard beyond pre-ASF levels,
or if weather related issues become
more frequent
 Ag commodity boom not uniform –
row crops are up, fruits are flat,
while vegetable prices are down
McKinsey & Company 5
 COMPARABLES

Across the board consumer companies are faced

with the impact of inflation and are taking
action to mitigate future risks
"Broad-based inflation is impacting many of the commodities, packaging materials, and transportation
channels important to our business. We are mitigating the impacts through a combination of higher
pricing inclusive of list price increases, reduced trade and net revenue optimization strategies, and
continued cost management”
Clorox told investors during the company's third-quarter 2021 results on April 30 that the company has
Price has consistently been
seen "significant resin price inflation." the first response, but as
"As we've mentioned, we'll manage inflationary pressures holistically using all the tools in our inflation pressure
toolbox," Burhan said. continues, CPG companies
“This is one of the bigger increases in commodity costs that we've seen over the period of time that I've are deploying a holistic
been involved with this, which is a fairly long period of time,” P&G COO Jon Moeller told analysts in an toolkit including cost
April earnings call
management, and product /
It will begin "the process of implementing price increases on its Baby Care, Feminine Care, and Adult
Incontinence product categories in the United States to offset a portion of the impact of rising portfolio design
commodity costs”
Coca-Cola's CEO James Quincey told CNBC's Sara Eisen on "Squawk on the Street" that the
company would be increasing prices to offset rising costs.
"We intend to manage those intelligently, thinking through the way we use package sizes and
really optimize the price points for consumers”
"Price increases have been implemented, and a second-round is underway, with plans for a
third-round to be implemented in the third quarter," Michael Graham, Reynolds CFO, said during the
company's first-quarter earnings call in May
During the pandemic, Frito-Lay pursued an aggressive SKU reduction program to increase throughput,
but has re-expanded portfolio to meet the assortment it’s variety-seeking customers want, now
focusing on end-to-end supply chain levers and building capabilities to enable consumer promise

McKinsey & Company 6


CPG responses to inflation – three themes on what matters
I. Maintain relentless
focus on execution
Major focus on “winning the day”
through cross-functional war
rooms and swift actions – Global
logistics market dislocation and
other supply-side disruption will
continue to place pressure on
service and cost performance in the
near to mid-term
COVID exposed true potential of
Lean and focus on operational
efficiency as volume growth
pushed supply chains to higher end
of efficient frontier – and ability to
quickly drive efficiency in never-
seen-before situations
II. Accelerate digital,
analytics, and
automation
Debate over importance of digital
has been settled – in front,
middle, and back of house –
Growth in eCommerce accelerated
(+25% in 2020). Data and
technology much more broadly
accessible to be “mined” to improve
e2e value chain
Comprehensive automation
programs pursued as an unlock –
Warehousing and Manufacturing
costs estimated to continue to
rise, fueled by an increasing mis-
match of labor demand and supply
COMPARABLES
III. Future-proof for
resilience and
sustainability
Demand variability an uncertainty
will sustain for some time as
supply chains work to recover from
disruptions, including acceleration
of DTC and eCommerce
Imminent need for more agile,
resilient, and sustainable supply
chains, not built for “just in case”
scenarios with a broader purpose-
driven value proposition beyond
“best cost” to differentiate and
appeal to consumers
McKinsey & Company 7
A suite of actions are available to manage the price-cost squeeze –
Operations and Organizational levers
Menu of most impactful actions we see CPGs take; not the exhaustive set of potential levers

Design Source Plan Make Deliver

Brand-led DtV at scale:
renovate products and
assortment to drive better
consumer and customer
value with higher margin –
starting with the brand
purpose and vision
Enhance supplier network
visibility and collaboration to
anticipate supply shocks before
they occur
Custom cost indices and
dashboarding paired with new
approaches to commodity price
forecasting and hedging
Accelerate strategic sourcing
events through digital
enablement
Nerve center – Real-time end-
to-end performance management
of SC planning & event
management
Dynamic network scenario
planning – enable agile
replanning of network
bottlenecks given increased
supply and demand volatility
LEAN excellence – Flawless
execution on the fundamentals,
engaging the workforce, and
building capabilities and culture
to retain talent
Plant of the future lighthouse
network – next set of digital use
cases
Digital twin for warehouse
design, slotting, labor planning
and productivity
Digital control tower to ensure
seamless execution
Revisit bracket pricing /
Supply chain efficiency
incentives with customers

Spend control tower: Deploy infrastructure to eliminate maverick spend, and ensure savings efforts flow through to the P&L

Network of the future – enabled by automation: revisit physical supply chain network to balance resilience, agility, responsiveness, and cost. Accelerate shift
towards automation to mitigate labor cost inflation

Transformation execution engine – activate a broader performance transformation by instituting an execution mindset with relentless focus on value delivery

Future of work (org and operating model). Define the organization and operating model of the future, adapting ways of working to the

Organizational health. Evaluating the long-term capacity to perform and defining a set of interventions to drive a robust set of management practices proven to drive health

McKinsey & Company 8

A suite of actions are available to manage the price-cost squeeze –
Commercial levers
Menu of most impactful actions we see CPGs take; not the exhaustive set of potential levers
Categories Potential levers Details
Price increase Surgical price moves by SKU for low-elasticity products
Pricing Fees & Institute surcharges for activities that drive excess cost: e.g. small order; slow-mover
surcharges surcharge; split shipment surcharge
Discount & Claw back discounts and allowance rates from non strategic products
rebate Remove promotion events with low value contribution; reduce frequency and depth
Promotions optimization
Relax clearance buy-down
and
discounts Reduce/eliminate payment terms or other credit used to drive clearance
Reduce/eliminate discounts use to drive extra volume in certain channels
Unauthorized deductions clean-up (e.g., where customers pay late and claim credit)
Optimize Launching of new innovations at a considerably higher average GP (e.g., 5-7pts);
Portfolio ad assortment mix Swap out low margin products
channel
management Optimize Product allocation and shift to channels/customers with margins (e.g., direct sales, best
channel mix customers in long-tail)

Payment terms Build in payment time flexibility into vendor contracts, or optimize between payment timing and
optimization discount based on current cost of capital
Retailer
relationship/ SLA Adjust SLA expectations in a way that enables cost minimization, like adjusting delivery to
contract optimization “group” shipments, or building in contract flexibility with vendors for delayed shipments
management Returns scrutiny (remove credit for returns not in policy)
Pricing meeting Set higher cadence in price adjustment meeting (e.g. from yearly to quarterly)
McKinsey & Company 9
What a program to offset inflation would look like
Illustrative example of how a company can proactively manage inflation risk

Execute on immediate
actions to weather the storm
Stand up a talent war room to minimize labor
related supply disruption. Create visibility into
wage competitiveness by market to ensure
employer of choice status (e.g., 25%+ wage
increases in competitive regions with retention
bonuses)
Take differentiated, consumer-back pricing
action, informed by granular understanding of
net elasticities
Revisit customer cost to serve and SCEF/
bracket pricing. Deploy new SCEF program to
adjust for changes in OTR freight costs
Embark on a set of bold near-term
decisions to impact ’22 fiscal year
Proactively define a targeted assortment based
on true incrementality and cost of complexity
Revisit retailer payment terms and service level
agreements to effectively monetize service
Reset category promo and discount dynamics
after promo drop during the pandemic, to “re-train”
shoppers
Accelerate platform-level design-to-value at
scale: renovate products to drive better consumer
/customer value along with higher margin
Reset the cost structure. Activate a broader cost
Kick off a set of big bets with longer
timelines
Launch a fresh round of M&A evaluation. Evaluating
opportunities to manage down supply risk and commodity
exposure as well as opportunistic acquisitions where
current environment challenged financials of a target
Accelerate automation timelines to mitigate labor cost
inflation. Pull forward existing deployment schedules, re-
evaluate business case assumptions on ‘out of money’
technologies
Enhance modeling/scenario planning to get ahead of
the curve. Develop digital & scenario planning capabilities
to understand where commodities are going, and have
actionable programs in place to mitigate

Develop cost dashboarding to create better transformation to offset sustained headwinds Cleansheet the network. Refresh the supply network
visibility into inflation (input and consumer) and Take aggressive procurement action on to balance import risk, ensuring multi-source strategies to
the implications for critical categories – both categories coming off peak. Full complement of drive SC resilience
real-time and projected tools and process to drive ‘gold standard’ sourcing

There is no one size fits all approach for combatting the cost-price squeeze inflation has created. The set of activities should be determined
based upon the current and projected P&Ls, market and consumer dynamics, and current functional maturity (e.g., procurement capabilities)

McKinsey & Company 10

Four ways to move forward

Options to take this forward When to deploy

1 Executive immersion session “Intrigued; need to learn more”
Facilitated, tailored session with executive team to discuss perspectives
on inflation trends, what others are doing, and what to do about it

2 Rapid inflation diagnostic/ readiness assessment “Don’t know what I don’t know; good
Rapid 1-2 week approach to develop a perspective on value at risk from to get a check-up and independent
inflation, as well as how prepared organization is to counter it, and what view on where we should focus our
high-value levers might be resources”

3 Targeted interventions to accelerate your response “Need help in a specific area; have
Focus on immediate impact with focused interventions (e.g., standing up overall transformation construct in
supply chain nerve center) to drive action and deliver immediate impact place already (potentially)”
in ’22

4 Multiple interventions via a central execution engine “We need to reinvigorate our
Execute on broad set of interventions simultaneously, coordinated organization around a common
through a central infrastructure/ways of working to both accelerate transformation theme to make a
impact and sustain the change difference”
McKinsey & Company 11
Inflation trends
by area

McKinsey & Company 12

 Labor
Inflation Freight
trends by area
Agricultural commodities
Hard commodities

McKinsey & Company 13

 LABOR

Wage inflation occurring across industries, most acute impact

in transport and warehousing
Average weekly earnings, compound annualized growth, through September 2021, percent

Pre-COVID, 10-year Pre-COVID, 2-year Post-COVID Post-COVID vs.

Dec. 2009 – Dec. 2019 Dec. 2017 – Dec. 2019 Dec. 2019 – Sept. 20212 Pre-COVID, 2-year

Construction 2.9 2.7 5.8 2.1x

Information, financial &
business services
2.8 2.9 6.1 2.1x
Leisure & hospitality 2.6 3.9 7.8 2.0x
Wholesale & retail trade 2.5 3.6 5.8 1.6x
Education & health 2.3 2.9 7.2 2.4x
Manufacturing 2.2 2.4 4.4 1.8x
Transport & warehousing 2.1 1.5 6.2 4.2x

Private sector, total1 2.5% 3.1% 6.7% 2.2x

Adjust for CPI 0.7% 1.0% 3.1% 3.2x

1. Private production and non-supervisory workers, all industries; sector detail for Mining & Logging, Utilities, and Other Services, not shown
2. CPI through August 2021

Source: BLS, Mckinsey analysis McKinsey & Company 14

 LABOR

The labor mismatch has follow-on impacts across the supply chain
Examples of impacts being experienced by our clients

Suppliers Internal Labor Customers

On-time delivery and fill rate Frontline labor shortages of 20-30% Orders cut by 20-40%
decreased by 20-30% Absenteeism up 20-30% Unpredictability in arrival times and
Predictability and visibility into Drops in individual productivity of service-levels
product arrivals has deteriorated ~20% due to turn over Delays in product receipt
Impacts exacerbated by supply
shortages

Companies that employ 3rd party logistics are also facing:

 Transport rates up 20-30% year on year
 On-time load/dispatch decreased by 20-30%
 Prime tender rejections up as much as 50%

Navigating the labor mismatch requires interventions across the value chain
Source: McKinsey experience, DAT transport analytics McKinsey & Company 15
Job opening rates no longer tracking to
LABOR

unemployment, suggesting people are choosing

not to take these jobs
Dec 2000- Mar 2020 Apr 2020 - Dec 2020 Jan 2021 - Sep 2021
The entire post pandemic
demand curve had been
US Job openings rate1, Percent, through Sep 2021 affected by structural shifts
in the labor market
7.5 In 2021, the relationship between job openings
and unemployment departed past trends There is a mismatch between
7.0 July
job openings and the people
6.5 Sep June
Aug in the labor force that are
6.0 May unwilling or unable to take the
April job openings
5.5 Mar
5.0 Feb The mismatch regional in
4.5 Jan Oct. Sept. July nature with different job
Nov. Dec. 2020 June types being affected
4.0 Aug.
Dec. May differently at the region, state
3.5 2019 and even zip code level
3.0 April
2000-2009
2020
2.5 Oct.
2.0 2009
2010-2019
1.5
2.5 5.0 7.5 10.0 12.5 15.0
US unemployment rate, Percent
1. The job openings rate is the number of job openings divided by the sum of total employment and the number of job openings

Source: Federal Reserve Chair press conference, https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20210616.pdf; BLS, McKinsey analysis McKinsey & Company 16
 LABOR

Labor supply is influenced by temporary and long-lasting factors;

the path forward is not certain

Potential temporary factors that could change Longer-lasting factors could continue
in short term influencing labor supply
Temporary government Changes in savings rate Immigration Change in mindset towards
benefits The US personal savings rate, Net immigration rate in the US work
In the summer of 2021, ~35 which tends to hover between 6- in 2021 has declined by 1.3% Employees leaving their jobs
million people, equivalent to 9%, rose as high as 35% during from 20203 indicated they were that they
almost one fourth of the the pandemic. By August 2021, didn’t feel valued by their
workforce were receiving it had dropped back to a 9% organizations and that they did
government support; The level not feel a sense of belonging at
number of people receiving work 2
government support has now
decreased to ~5 million people1
Suspended training programs Health concerns, Relocations Early retirement
(e.g. driver schools shut) school/childcare closures More than 15.9 million people Since COVID-19 started least
Suspension of activity in training Among survey respondents who moved during the pandemic; 1.7 million more older workers
centers (e.g. closure of driving had left their jobs, 45 percent Telepresence and work from than expected retired from the
schools due to COVID-19) cited the need to take care of home will could continue labor force4
family as an influential factor in impacting labor supply4
their decision2
1 BEA
2. McKinsey: ‘Great Attrition’ or ‘Great Attraction’? The choice is yours
3. American Enterprise Institute and College Crisis Initiative of Davidson College
4. United Nations - World Population Prospects

McKinsey & Company 17

 LABOR

Employer responses overly-focused on transactional factors

Employees are … However, employers

placing most value are over-indexing on
on relational transactional factors
elements (e.g., which are not primary
sense of belonging drivers (of attraction and
and feeling valued attrition (e.g.,
by managers and compensation,
the organization)…. alternative jobs)

Source: Article: ‘Great Attrition’ or ‘Great Attraction’? The choice is yours (n=4,924) McKinsey & Company 18
 Labor
Inflation Freight
trends by area
Agricultural commodities
Hard commodities

McKinsey & Company 19

 FREIGHT

Freight rates have steadily increased by 25%+

over the past 12 months, with surging demand
and low available capacity
YoY growth National average for trucking
National average rates by trucking category, $ per mile1 (Aug’20-Aug’21) contract rates and spot rates
3.2 have consistently increased at
Flatbed 33%
3.0 Reefer 27% 25-33% over the last 12 months
2.8 Vans 26% For food & ag. companies,
2.6 freight represents ~10% of
2.4 COGS (with contract rates
2.2
historically covering 90-95% of
demand)
2.0
Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21
YoY growth Surging demand for food & ag.
National load-to-truck ratio2 by trucking category, Indexed to Aug 2020 = 100 (Aug’20-Aug’21) companies, combined with the
350 Load to truck ratios have steadily
trucking capacity shortages are
300 increased over the May’20 to likely to continue through 2021-
Aug’21, indicating higher demand 22 and result in higher freight
250 vs. available capacity and likely rates (~40-50% increase) over
200 driving up freight rates
Reefer 60% the next 12 months
150 Flatbed 40%
100 Van 22%
50
Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21
1. Includes fuel and represent the average for contract and spot rate for each trucking category. Vans are versatile trailers that are used for shelf-stable food products.
Reefer’s are refrigerated trailers used for perishables
2. Represents total number of loads per truck and signals balance between spot market demand and available capacity

McKinsey & Company 20

Source: DAT, Bernstein
 FREIGHT

Over the long-term, key structural issues persist

and are likely to increase freight rates by low-to-
mid single digits annually over next 5-10 years
Truck transportation employees, ‘000 Rapid increase in e-commerce penetration
1,540 and key structural issues are expected to
1,520
drive up freight rates over the next 5-10
-33 years
1,500
Payrolls, ’000  Rise of e-commerce and their preference
1,480
for swift fulfilment, are expected to drive
1,460 up rates for private & dedicated and LTL
1,440 modes
1,420  Despite recovery, trucking continues to
1,400 face driver shortages due to an aging
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 demographic, nature of work, relatively
Utilization rate by trucking mode lower wages and stringent drug testing
 State law mandates (e.g., California’s
93% Ecommerce preference for les efficient trucking
modes to drive up rates for these modes zero-emission by 2035) likely to increase
maintenance and equipment costs
67%
60%  Additional federal taxation on financing
50% aging highway infra. likely to
disproportionately affect road freight
operators
 Increase of “Nuclear verdicts” towards
trucking accidents to affect insurance
Full truckload Private & dedicated Less-than-truckload Intermodal costs

McKinsey & Company 21

Source: BLS, Bernstein
 FREIGHT

Ocean freight have seen a significant rise over 2019-21, driven by a

strong drop in freight supply and a small increase in freight demand

Ocean freight rates by trade lane, 2019-21, USD/ FEU Ocean freight demand & supply, 2021 vs. 2020
16,000
SCFI Shanghai-Europe
SCFI Shanghai-WC America
3%
SCFI Shanghai-EC America
12,000

8,000 ~7.5x

-7%
4,000

0
Jan- Sep- Global import/ export demand2 Global supply3
19 21

 The recent spike in freight rates has been driven by ~7% drop in container supply (Jun’ 21 vs. Dec’20), combined with a small increase in
global demand driven by NA imports of goods during COVID
 Outlook suggests freight rates returning to normalcy by Q1 2022, as supply issues expected to normalize after the holiday season

1. Additional surcharges putting it more than quoted prices

2. Global supply trend based on 7-day moving average TEU capacity of ships traveling 7.5kts or more. Growth rate based on avg. for Jun'21 vs. Dec'20

Source: SCFI data sourced from SIN Clarksons McKinsey & Company 22
 FREIGHT

The N.A. demand surge and COVID-issues create congestion

at ports, impacting supply
Daily containership sailing capacity1, Mn TEU
Actual 7-day moving average
Suez
closure

Chinese Chinese Capacity Increasing congestion in Port congest-

New Year New Year reduction ports globally ion due to
20 and as liners COVID-19
productio took out outbreaks
n delays capacity
in China due to
from first demand
19 COVID-19 fall
wave
-13%
18

17

16
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep
2019 2020 2021

1. Daily containership sailing capacity is measured as the TEU capacity of ships traveling 7.5kts or more

Source: McKinsey DeepBlue McKinsey & Company 23

 Labor
Inflation Freight
trends by area
Agricultural commodities
Hard commodities

McKinsey & Company 24

Some agricultural commodity pricing has
AGRICULTURAL COMMODITIES

skyrocketed – putting margin pressure

on CPGs
Commodity prices – Wheat, Corn, Soybean, Glass, Tomato Recent commodity headwinds
Jan 2016 – Apr 2021, Index = 100 for Jan 2016 has placed increased pressure
Wheat Corn Soybean Glass Tomato on CPG margins
170 “I don’t see how we can
160 sustain our current margin
structure without achieving
150
some sort of price realization
140 this year” – Executive at major
130 CPG
120
“While we thoughts we were
110 well hedged, the high demand
100 100 Index line in addition to commodity
pressure are really squeezing
90
us on margin – I do think there
80 is an opportunity for us to
70 better leverage revenue
management in these times” –
60
2016 17 18 19 20 21 2022 Executive at major CPG
McKinsey & Company 25
 AG COMMODITIES

Where are we in the ag commodity cycle?

Perspective on the stickiness of recent price spikes

1 2
Recent price spikes would
need to be sustainable
beyond 2023 to confirm a
super cycle is present in
global agriculture
commodities
Recent price spikes have fueled
rumors of a new super cycle in global
ag commodities, but we still need to
confirm the price spike is sticky
beyond 1-2 years before we declare a
new super cycle has started
The latest price spike points
to a short-term supply shock
which could turn into a
sustained super cycle if
demand-side shocks emerge
An aggregate demand or commodity
demand shock would be needed to
generate a sticky price spike
necessary for another super cycle to
emerge since supply-side shocks have
historically generated transitory (<2
years) price spikes
3
Agri-food firms should
prepare for either eventuality
– the emergence of a super
cycle or a return to
business-as-usual prices in
ag commodities
Regardless of where or how long the
commodity cycle lasts, firms should act
today to mitigate price risks and
capitalize on profit tailwinds by
investing in projects that will deliver
sustained, long-term ROIC
improvement

McKinsey & Company 26

 AG COMMODITIES

1. We are at an inflection point in the ag commodity cycle and

would need recent price spikes to stick to trigger a new super cycle
The recent price spike does not yet meet the stickiness requirement to be deemed a new super cycle

Detrended price index2 Commodity cycle effect Super cycle price booms

Impact of the commodity cycle effect on agricultural commodity prices, index1 For a new super cycle to
1904-15 1941-45 1965-75 2009-15 emerge, we would have
0.6 to believe
Cycle Illustrative
drove
prices 0.4 Scenario 1 Commodity supply and
above demand are unbalanced
A new super cycle emerges
trend and the ag commodity price and create price booms that
0.2 spike sticks last beyond one planting
cycle
No
change 0
Multiple commodity prices
Scenario 2
are affected, signaling a
Return to business-as usual market-wide price spike is
-0.2
and the ag commodity price
Cycle underway
spike erodes over the next
drove 1-3 years
prices -0.4
below The price spike is sticky
trend beyond the business cycle
-0.6 with a typical super cycle
1900 10 20 30 40 50 60 70 80 90 2000 10 20 2030 spike lasting 5-11 years
1. We conduct this analysis using a production value weighted index of 20 agricultural commodities. See appendix for full list. The natural log of the index is then
decomposed into its component parts such that: Commodity price index = Long-run price + Commodity cycle effect + Short-run price effect. Values presented are the
natural log of the index.
2. The Detrended price index = Commodity price index – Long-run price to show the impact of price movement on the index outside of the long-run trend.

Sources: Jerrett (2021), Citigroup Smith Barney & Heap (2005); Jacks, D.S. (2019), "From Boom to Bust: A Typology of Real Commodity Prices in the Long Run." Cliometrica McKinsey & Company 27
13(2), 202-220; Bank of Canada
 AG COMMODITIES

2. We tend to see supply and demand fundamentals as stronger

indicators of long-term prices than commodity forward curves
Forward curves tend not to price in future supply and demand events and instead slope upward to account for storage costs

Forward curve Spot price

Supply and demand
Corn spot and forward curve history, USD cents per bushel fundamentals:
A US corn prices were buffeted
during the 2010-13 period by
A B C D exports and ethanol (oil) prices
850
which partially triggered a new
800 ag commodity super cycle

750
B Strong global supplies and
700 lower international demand
dampened prices during the
650 2014-16 period
600
550 C The 2017-2020 period was
characterized by low oil prices
500 and low export demand due to
the trade war and ASF
450
400 D The most recent 6 months have
been an unwind of the forces
350 previously hampering corn and
grain prices and lower supplies
0 volumes in South America
2010 11 12 13 14 15 16 17 18 19 20 21 2022

Source: Futures and spot data via Barchart McKinsey & Company 28
2. Shrinking global stocks have signalled …which has partly led to significant price
a supply-side shock in many crops… spikes over the last 12 months.
6/10 major ag commodities are +/-2 pp out of 5 yr STU trend Most commodity prices have spiked >30% since August 2020
20212 stocks-to- STU gap below STU gap above +/-2pp out of
use (STU) level 5 year average 5 year average 5 year trend

Points from
World stocks-to-use (inventory) ratios1 5 yr average Change in world spot price since August 20204, percent

Corn 25% 4.0 Corn 96%

Soybeans 25% 3.9 Soybeans 62%

Cotton 71% 3.5 Cotton 35%

Barley 12% 2.5 Barley 83%

Oats 10% 2.0 Oats 40%

Rice 33% 1.9 Rice3 -6%

Sorghum 6% 1.8 Sorghum 120%

Wheat 37% 1.4 Wheat 37%

Sugar 50% 0.3 Sugar3 34%

Coffee 22% 2.1 Coffee3 20%

0% 20% 40% 60% 80% 100%

1. As of July update of the USDA FAS Production, Supply, and Distribution database 3. Thailand rice used for rice. World free-market sugar used for sugar. Robustas coffee used for coffee.
2. Marketing year for each respective commodity. 4. As of August 2021
Source: USDA Foreign Agricultural Service, International Monetary Fund, UN Food and Agriculture Organization McKinsey & Company 29
 AG COMMODITIES

2. The recent commodity supply shock likely won’t create the sticky price spike
needed for a new super cycle, but demand-side drivers could
Historical supply and demand drivers of commodity price movements
Details to follow High stickiness Low stickiness

Historical movement Historical persistence of price Stickiness of

Type of shock explained, percent Historical example spike1 price spike2

 Weather-related shocks to 0-2 years as during which farmers

A Commodity supply shock grain supplies in 2010 plant more acres which oversupplies
driven by an unexpected
supply issue with one or
19% the market and quickly erodes the
 Lower-than-expected grain
more commodities price spike
stocks in 2019

 GDP growth following WWII 7-15 years where a shift in aggregate

B Aggregate demand shock commodity demand triggers a price
driven by unexpected 33%  Greater Asia economic
spike that lasts until GDP growth is
growth in global GDP expansion in 2000s
again predictable

 US corn demand by ethanol 10-15 years where farmers increase

C Commodity demand producers in 2000s production to meet higher quantity
shock driven by unexpected
growth in demand for one or 48% demanded and eventually oversupply
 Feed demand for China
more commodities the market
swine herd growth in 2010s

1. Historical persistence of price spike refers to how durable and long-lasting a price spike has been before prices return to long-run trend
2. Stickiness of price spike refers to how durable and long-lasting the initial price spike is before declining

Source: International Monetary Fund, United States Department of Agriculture; Jacks, 2020. "What drives commodity price booms and busts?," Energy Economics, Elsevier, vol. 85(C). McKinsey & Company 30
 AG COMMODITIES

2B. An aggregate demand shock is unlikely

unless the US or China beat growth forecasts
Real GDP growth is driven by the anticipated COVID recovery, not a shock
COVID impact China GDP US GDP China GDP growth US GDP growth

US and China annual GDP and year-over-year growth rate

Trillion USD …the US is the only large economy
$30 projected to surpass the level of GDP
it was forecast to have in 2022 in the
$20 absence of this pandemic.
$10 Dr. Gita Goinath, International
Monetary Fund
$0
2016 18 20 22 24 26 28 30 32 34 2036
Additional data to monitor
GDP growth rate
Employment rates in core consumer
10.0% economies, particularly the US and China
where growth rates have not recovered
5.0% JPMorgan Global PMI Index to monitor
purchasing manager activity and upstream
economic activity
0%
2016 18 20 22 24 26 28 30 32 34 2036 Brazilian GDP growth which can serve as
a proxy for commodity-exporting markets
-5.0% throughout the world
Source: International Monetary Fund projection as of 20 May 2021 McKinsey & Company 31
 AG COMMODITIES

2C. A commodity demand shock could come

from a rapid recovery of the Chinese hog herd
Chinese hog herd growth could raise feed demand +4.4pp above ‘22 baseline
Historical Scenario 2 Scenario 1

Global grain use for livestock feed1, Million tonnes

We think that this robust Chinese
1,550
demand for feed grains is going to
1,525M Scenario 1: Chinese hog
1,518M
production returns to 2013 values
remain in place for at least 2-3 years.
by 20222 by growing +125M in 2021
and +40M in 2022
Roland Fumasi, RaboBank
1,500
1,484M 1,477M
Scenario 2: Chinese hog
production is negatively impacted
by ASF in 2021 and does not grow
1,450 beyond 2020 herd size
Additional data to monitor
1,421M
Global livestock production particularly in
If Scenario 1 comes true, it
1,400 would be like adding a second Asia and South America where per capita
US hog herd to global feed income is growing
grain demand3
Global biofuel production in Brazil and
the US as economies reopen and fuel
1,350
2019 20 21 2022 2023 demand rebounds
International trade commitments which
1. Global feed use includes feed used for corn, protein meals, wheat, other coarse grains, distiller’s dry grains, skim milk powder, and whey powders
2. Growth assumes the same level of production growth as seen from 2019 to 2020 (+125M head in 2021); total production returns to 2013 all-time high
can be leading indicators of demand shifts
production of ~730M hogs by 2022 (+40M head in 2022). Feed demand assumes 280lb hogs at slaughter at 3:1 feed conversion ratio. in non-growing regions
3. US hog production roughly ~135-140M in 2019 and 2020

Source: UN FAO-OECD Outlook, United States Department of Agriculture National Agricultural Statistics Service, Bloomberg, expert interviews McKinsey & Company 32
 AG COMMODITIES

2. Several shocks could support today’s price boom beyond

2 years, but most will likely emerge after today’s supply-driven
boom subsides
Commodity supply shock Aggregate demand shock Commodity-specific demand shock

Short term Medium term Long term

Less than ~2 years ~2 to 5 years More than ~5 years

Potential to Weather & climate change
negatively impact yields
increase
commodity
prices Strong recovery of Chinese
swine herds
Commercialization and
expansion of livestock
farming in APAC
Government limitations on
agrichem use shift commodity cost
curves
Per capita meat consumption
grows in developing economies
Plant-based plastics become the
packaging of choice for CPGs
Lift of the one child policy in China
expands global demand
Accelerated economic expansion
in developing economies increase
per-capita food expenditure

Potential to K-shaped recover results in Reduced trade flows create New climate-resilient varieties
decrease dampened global GDP domestic surpluses that erode thrive through climate change
commodity and income growth domestic commodity prices
Digital and precision agriculture
prices Shift to plant-based proteins enhance productivity and shift cost
reduce feed grain demand curves downward
Accelerated shift to electric
vehicles in North America

McKinsey & Company 33

 AG COMMODITIES

3. Agri-food firms largely won in the last price boom, but not all parts
of the value chain retained performance gains in the post-boom period
Agri-food firms largely benefitted from the last commodity price boom, but not all sustained performance post-boom

The last price boom lifted ROIC performance in all segments …but only downstream players sustained higher ROIC
of the agri-food value chain… performance gains after the price boom ended.
ROIC performance by value chain node, 50th percentile ROIC1 ROIC performance by value chain node, 50th percentile ROIC1
12 12
11 11
10 10
9 9 Boom
8 Boom 8 2009-2015
2009-2015
7 7 Post-boom
2016-2019
6 Pre-boom 6
5 2000-2008 5
4 4
3 3
2 2
1 1
0 Inputs Ag Primary Secondary Food & Alcohol & Grocery and
0 Inputs Ag Primary Secondary Food & Alcohol & Grocery and
production processing processing & beverage tobacco food service production processing processing & beverage tobacco food service
& farming & trade ingredients manufacturing & farming & trade ingredients manufacturing
Upstream Downstream Upstream Downstream

1. ROIC including goodwill and intangibles

Note: Average ROIC calculated for three periods - Pre-boom (2000-2008), Boom (2009-2015), and Post-boom (2016-2019).

Source: McKinsey Agri-Food Value Creation Analytics (n=869 agri-food firms) McKinsey & Company 34
 AG COMMODITIES

3. Agri-food leaders should consider two key variables: how long

the price boom lasts and where prices find equilibrium post-boom
2021+ ag commodity prices will be determined by the stabilization phase length and price level once the market corrects

Details to follow
Illustrative ag commodity price index, 2020 = 100

Phase of rapid Phase of Phase of market 2021+ ag commodity prices

escalation stabilization correction will be determined by:

1 Stabilization phase length

to understand how long we
can expect prices to stay
elevated at the current price
New price
2 level
equilibrium:
Higher prices
2 Price level once the
market corrects to identify
Parity with
if prices will be above,
100 pre-2020
below, or at the same
prices
relative price level as Q1
Lower prices 2020

2020 2021 Correction

1

McKinsey & Company 35

 AG COMMODITIES

3. Of the nine potential ag commodity price scenarios, A1 through A4

are considered the most likely based on prior commodity price booms
Nine potential scenarios exist for global agriculture commodity prices based on supply response and crop performance

Undersupply of
ag commodities
B1 B4 B5
Supply response does not adequately
1 meet the global demand for commodities
and prices remain above pre-boom levels
Price level once
the market Adequate supply of
corrects ag commodities A1 A3 B2
Price level for global ag Supply roughly matches demand and
commodities post-boom rebalances to equilibrium prices close to
depends largely on the pre-boom levels
supply response of
producers
Oversupply of
ag commodities A2 A4 B3
Supply, in response to the price boom,
oversupplies the market and prices fall
below pre-boom levels

Until the next crop cycle
Crop cycles for Q4 2021 and Q1 2022
are strong and consistent; little to no
unfavorable growing conditions
Until two crop cycles pass
Crop cycles for Q4 2021 and Q1 2022
fall short of demand and extend the
price bump through 2022-23 harvests
Until three or more crop
cycles pass
Crop cycles are largely inconsistent for
three or more growing cycles across
multiple global growing regions

2 Stabilization phase length

The stabilization phase length will be determined by how well crops perform over the next one to three crop cycles.
More favourable growing conditions will result in more consistent supply and a shorter stabilization phase.

McKinsey & Company 36

 Labor
Inflation Freight
trends by area
Agricultural commodities
Hard commodities

McKinsey & Company 37

 HARD COMMODITIES

COVID-19 pandemic triggered supply disruptions and government

fiscal stimulus that created pressure on commodities

COVID-19 caused a sudden and ...which generated disruptions in …and prompted Governments to
deep drop of economic activity.... many value chains… announced large fiscal stimulus
Industrial Production Index1 Key challenges faced by companies Cumulative 2020 COVID-19 stimulus,
2010 = 100 (Global), %, 20204 share of GDP, %
Direct transfers2 Guarantees and liquidity support3
110 Significant drop
35%
in demand
105 EU
China 5 1 6
USA Material shortage/
33%
100 Supply chain disruption
95 France 8 16 24
Worker shortages/
31%
90 reduction in productivity

85 Germany 11 28 39
Cash flow issues 23%
80
UK 16 16 32
0 Planning issues 19%
Jan-2021
Jan-2019

Jan-2020

Apr-2021
Jul-2019

Jul-2020

Significant increase USA 17 2 19

7%
of demand

1. Indices of industrial production (IIP) for total industry, manufacturing, energy and crude petroleum; and further disaggregation of manufacturing production for intermediate goods and for investment goods and crude steel
2. Additional or accelerated spending and forgone revenues to/from businesses and individuals
3. Equity injections, asset purchases, loans, and debt assumptions, among others
4. N=279

McKinsey & Company 38

Source: OECD; McKinsey COVID-19: Global Manufacturing & Supply Chain Pulse Survey (2020); IMF Fiscal Monitor; Oxford Economics,
Database of Country Fiscal Measures in Response to the Pandemic, January 2021; McKinsey Global Institute (MGI)
 HARD COMMODITIES

The uneven distribution of price increases suggests they were not

driven by a fundamental surge in demand
Price increase (Jan 2020 – Jul/Aug 2021)1

Paper Based packaging Glass Aluminum Steel Resins/Plastics

+9% +5% +50% +50-63% +40-50%

WTI/Brent Natural Gas (pipeline) Copper Tin Lumber

+8-12% +102% +54% +110% +25%

Commodities witnessing price spikes were driven by supply shocks and weather events. Not necessarily due to a demand shock

1. For paper based packaging we used PPI industry data for Paper container mfg, for glass we used PPI industry data for Glass container manufacturing and
for resins/plastics we used PPI industry data for Plastics material and resins mfg; other prices uses the spot prices for actual commodities

McKinsey & Company 39

Source: Haver Analytics, FRED, , McKinsey analysis
Case example: Price inflation in commodities
HARD COMMODITIES

such as polyethylene were driven by regional

factors (not broad-based)
Polyethylene price trend, 2019-21, $ per metric ton Asia and US PE typically
moves in lockstep (with price
2,800
difference arbitraged through
Texas deep freeze takes out NA Polyethylene
2,600 global trade)
~75% of US PE capacity for
2,400 ~6 weeks (~9% of annual
Both US and Asia PE recovered
2,200 production lost)
from COVID together with
2,000 crude
1,800 In spring, new capacity came
1,600 online in China, pushing global
prices down
1,400 Asia Polyethylene
1,200 US price continued up to an all-
time high, as Texas Deep
1,000
Freeze took out 75% of US PE
800 capacity
US and Asia Asia PE goes back into
600 PE rises in line through as new Due to logistics hurdles, price
400 with crude price capacity comes online cannot currently be arbitraged
200
0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21

Source: IHS Markit McKinsey & Company 40