The world is engulfed in a severe food crisis. Food producers are already facing supply chain disruptions, and consolidation in the sector is ramping to help mitigate problems.

Food producers in North America may need to plug the gap by vertically integrating their operations and driving efficiency like never before. This consolidation is already underway, according to a new report by middle-market M&A advisory firm Meridian Capital.

The pace of mergers and acquisitions in the North American agribusiness sector has ramped up over the past seven years and “is likely to accelerate in this segment over the next 10 years,” according to James Rothenberger, managing director of Meridian Capital.

Rothenberger’s team has seen deal activity decline in recent quarters as lenders pull back financing for agribusiness deals. “But that gap in financing has been replaced with equity, holding valuations constant,” he says.

Deals are expected to rebound sharply in the second half of 2022 and for much of 2023. Private equity firms that are collectively sitting on record-high levels of capital are likely to seek out acquisition targets, according to the report. The key factors driving this rebound are long-term megatrends in agribusiness such as supply chain inefficiency, the need for near sourcing, and the growing cost of meeting sustainability targets.

“The North American agribusiness sector is one of the most fragmented industries in the continent, with less than 3 percent institutional ownership of the agribusiness supply chain,” says Rothenberger. “Vertical/horizontal integration around the supply chain – enabling food packers and processors to control more of their packaging or input costs, and supply availability, in light of broader supply chain disruptions and inflation.”

Consolidation should also help growers mitigate the costs of sustainability regulations. Meridian’s survey found that food producers believe consumers are unlikely to pay higher prices for enhanced sustainability practices. Rampant inflation further decreases the consumer’s ability to bear these costs, which means producers have to swallow them.

Institutionally funded large-scale producers could also invest in near-sourcing parts of their supply chain and holding larger inventories of fertilizers to mitigate further disruptions from the Ukraine conflict.

A confluence of all these demands, supply, and regulatory pressures could compel the agribusiness sector to further consolidate in the years ahead.

-Vishesh Raisinghani