Global Food Commodity Inflation Seen Easing In 2012 - Moody's
December 18 2011 - 7:30PM
Dow Jones News
Global food commodity inflation will likely ease in 2012,
Moody's Investor Service said Monday, but the rating company warned
that food companies might attempt to recapture stronger profits
through price increases, after exhausting margin-saving
measures.
The ability to pass raw material price increases on to customers
has cushioned the food sector over the last year, Moody's said, but
slowing demand due to Europe's uncertain macroeconomic situation
will make it harder for them to do so in future, and margins could
contract if input costs rise again.
The rating company said the price of globally traded commodities
rose rapidly in the first half of 2011 and drove input costs higher
for many industries, causing margins to contract in the food
sector.
Prices for some commodities remain at historically high levels,
Moody's said, despite easing on uncertainty over future demand as
the pace of economic growth in 2011 and the outlook for 2012
deteriorated.
It said large European and multinational food producers such as
Nestle SA (NESN.VX), Unilever PLC (UL) and Danone SA (BN.FR) have
been able to mostly offset the effect of dearer inputs by reducing
other costs and passing on price increases, albeit with a three- to
six-month lag.
Such companies have very strong and diversified portfolios of
brands, Moody's said, which often benefit from segment-leading
positions and provide more leverage in negotiations with
retailers.
Similarly, the rating company said large food retailers such as
Tesco PLC (TSCO.LN) and Carrefour SA (CA.FR) have been able to
adjust to food inflation by enhancing their offering mix, cutting
costs, starting new promotions and leveraging pricing power over
medium and small food producers.
However, these medium and small food producers have cited rising
commodity prices and input costs as a constraint on operating
profits, because of their limited bargaining power and higher
customer concentration.
Companies such as Campofrio Food Group SA (CFG.MC) have had to
aggressively cut costs, negotiate hard for price increases, push
for increased volumes on lower-margin offerings and develop
innovative products or new distribution channels, Moody's said.
Dealing with increasing input costs for these companies is a
delicate and sometimes perilous exercise, Moody's said, citing
Premier Foods PLC's (PFD.LN) significant volume declines after
passing on nearly all input cost inflation.
-By Michael Haddon, Dow Jones Newswires; 4420-7842-9289;
michael.haddon@dowjones.com
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