A significant portion of our input costs comes from commodities such as raw potatoes, edible oil, grains, starches, and energy. These commodities are subject to price volatility and fluctuations in availability caused by many factors, including: changes in global supply and demand, governmental incentives and controls (including import/export restrictions, such as new or increased tariffs, sanctions, quotas or trade barriers including the tariffs and surcharges announced by the U.S. throughout 2025 and 2026 on U.S. imports, and corresponding retaliatory tariffs imposed by foreign governments on U.S. exports, as well as selective tariff exemptions), weather conditions (including any potential effects of climate change), fire, natural disasters (such as a hurricane, tornado, earthquake, wildfire or flooding), disease or pests, agricultural uncertainty, water stress, health epidemics or pandemics or other contagious outbreaks, as was the case with the COVID-19 pandemic, limited or sole sources of supply, inflation, political uncertainties, acts of terrorism, governmental instability, war or other conflicts (such as the war in Ukraine, conflicts in the Middle East, tensions between China and Taiwan and recent geopolitical developments in Venezuela), or currency exchange rates.
We continue to experience elevated commodity and supply chain costs, including the costs of labor, raw materials (such as edible oil, grain and starch), energy, fuel, packaging materials, and other inputs necessary for the production and distribution of our products, as well as transportation and logistics costs. Since late February 2026, disruptions to shipping routes and heightened geopolitical tensions in the Middle East have contributed to increased volatility in global commodity and transportation markets. While the duration of the conflicts in the Middle East remains uncertain, prolonged instability could further raise input and logistics costs and affect related demand in certain markets. Commodity price increases, or a sustained interruption or other constraints in the supply or availability of key commodities, including necessary services such as transportation and warehousing, could adversely affect our business, financial condition, and results of operations.
Though we provide most of our customers with local/regional supply, products we manufacture at our one production facility in Canada and import to the U.S., as well as the 5% of our inputs, primarily edible oils and natural gas, that are sourced in Canada, are currently exempt from U.S. tariffs as they are compliant with the U.S.-Mexico-Canada trading agreement. Despite the current exemptions, the implementation of new tariffs on imports from Canada, Mexico, China or other countries for an extended period and without specific exemptions for our products or the termination of the U.S.-Mexico-Canada trading agreement may adversely affect our business, financial condition and results of operations. Further, any retaliatory tariffs on U.S. products by other countries, or other trade protection measures by foreign countries in favor of their local producers of competing products, such as governmental subsidies, tax benefits, and other measures giving local producers a competitive advantage over Lamb Weston, may adversely affect our business and results of operations in those countries.
Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products, productivity initiatives or through our commodity hedging activity, may not be successful or sustainable. Our future success and earnings growth depend in part on our ability to maintain the appropriate cost structure and operate efficiently in the highly competitive value-added frozen potato product category. Higher product prices may result in reductions in sales volume, especially given the current highly competitive frozen potato product market and soft restaurant traffic, most notably in Europe, and the volatility of the macroeconomic environment. If we are unable to increase prices, or if price increases are not sufficient, to offset these increased costs adequately or in a timely manner, and/or if they result in significant decreases in sales volume, our business, financial condition, or results of operations may be adversely affected. We continue to implement profit-enhancing initiatives to improve the efficiency of our supply chain and general and administrative functions. However, gaining additional efficiencies may become more difficult over time. In addition, there is currently no active derivatives market for potatoes in the U.S or Europe. Although we have experience in hedging against commodity price increases, these practices and experience reduce, but do not eliminate, the risk of negative profit impacts from commodity price increases. As a result, the risk management procedures that we use may not always work as we intend. To the extent we are unable to offset present and future cost increases, our business, financial condition, and results of operations could be materially and adversely affected.