The economic crisis that has gripped Europe since 2008 has put financial pressure on households like never before. The sense of austerity that swept across Europe, as governments implemented tough fiscal policies and severe budget cuts, was compounded by high unemployment, wage stagnation, increasing taxes and a debt-laden middle class squeezed like never before.

Looking at their own household budgets, cash-strapped consumers began to make cuts and savings wherever they could and the weekly spend on food was a prime target for cutbacks. As a result, discount retailers such as Aldi and Lidl have gained unprecedented shares in European markets as consumers opt for cheaper alternatives.

The demand for cheaper food has led the food industry in Europe to seek cost savings. This led to the creation of sprawling integrated supply chains, enabling suppliers to source ingredients for processed foods from wherever was cheapest.

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These complex supply chains criss-cross the continent via networks of traders, dealers and subcontractors, supplying alternating orders through a just-in-time operations management approach.

The complexity of modern food supply chains was clearly outlined when the horsemeat scandal unfolded across Europe. In one instance, horsemeat from a Romanian abattoir was sold to a French supplier by way of a Cypriot trader, and then passed on to a French food processing company before landing on British and French supermarket shelves.

Murky supply chains such as this were at the core of the horsemeat adulteration scandal as processors increasingly sourced cheap supplies in far-flung corners of Eastern Europe as filler for use in cheap frozen burgers.

The squeeze on prices came from large retailers and brands looking to drive down prices as consumers cut spending at a time when beef prices were at record highs and energy costs soared. With so many intermediaries in the supply chain, particularly in regions where the food trade may be in the hands of organised criminals, the capacity for adulteration was huge with the possibility of tracing the fraud very low.

The traceability and oversight controls of the supply chain were discovered to be ineffective.

Infant formula in China

In China, food safety is one of the greatest sources of public discontent after a number of food scares. Major scandals in the dairy sector in 2004 and 2008 damaged the trust in locally produced products.

In 2004, substandard milk led to deformities in children while the 2008 melamine scandal in particular was one of the worst food safety scandals in China’s history.

An estimated 300,000 babies were infected by contaminated baby powder, resulting in six infant fatalities. Melamine was intentionally added to milk to artificially increase the protein count.

The incident dealt a devastating blow to China’s indigenous dairy industry, which was thriving thanks to a surge in demand for baby formula from an expanding wealthy middle class. As a result, the demand for imported products has risen sharply, with more than half the Chinese baby formula market now dominated by foreign brands. In some cities the market share is as high as 80% and it attracts a significant premium.

Since the melamine scandal, the regulation environment in China is getting more stringent and complicated. There are now no fewer than 12 government regulation agencies involved in infant formula.

In August 2014, Chinese authorities issued a recall of potentially contaminated milk imported from New Zealand when Fonterra announced that harmful bacteria was identified in three batches of whey protein concentrate.

False alarm

While the scare proved to be a false alarm, the consequences for the New Zealand dairy industry could have been significant, with 90% of milk imports in China coming from Fonterra, equating to 10% of the group’s NZ$22bn turnover.

Another food scandal that rocked China in the past year came when an undercover media report showed workers at a Shanghai Husi Food Co plant using out of date meat and doctoring the labelling displaying production dates.

Shanghai Husi Food Co is a subsidiary of the OSI Group, a US-based holding company of meat processors. In the fallout from the scandal, McDonald’s and KFC dropped Shanghai Husi Food Co as a supplier for their operations in Asia, costing the OSI Group hundreds of millions in revenue and forcing it to lay off 340 staff.

Impact

The recent prevalence of food scares, both global and local, has sharpened the public’s focus on the food sector and some of the sprawling supply chains that have proven anything but traceable. People are right to be sceptical of where their food comes from and how safely it is produced, as food scandals have caused serious harm to consumers in some parts of the world.

Also, large multinational chains such as McDonald’s want an image where they are close to the farmer and can offer consumers peace of mind that their products are fully traceable to local farms. As a result, these customers are putting greater pressure on producers and suppliers to improve their systems at risk of losing their business.

Read more from this year's KPMG/Irish Farmers Journal Agribusiness report here.