In the spotlight: Food makers still face commodity pressure
We are just days away from the end of the first quarter of 2012, a year in which manufacturers were hoping the pressure of last year's commodity inflation would ease significantly.
2011 was the second year in four that the food industry faced a spike in commodity prices. Ken Powell, chairman and CEO of General Mills and 30-year veteran of the US food giant has said the inflation the Progresso soup and Haagen-Dazs ice cream manufacturer has battled in recent months was the highest he has seen in his time at the company.
This year, suppliers would have hoped an easing in commodity costs would help bolster margins at a time when consumer confidence in many Western markets remains weak and with retailers licking their wounds after a challenging 2011 (Carrefour, Tesco and Metro Group to name just three - and what a three to name).
However, those hopes may not materialise as quickly as many manufacturing giants expect. Some commodity costs remain stubbornly strong (sugar), others have reached annual highs in recent weeks (palm oil) and the cost of other ingredients have escalated in the wake of regulation (eggs).
And, as just-food exclusively reported from the Consumer Analyst Group of Europe investment conference in London last week, ingredient giants like International Flavor and Fragrances and Givaudan are again looking to push through price increases to their manufacturing customers this year.
A rise in sugar prices was a key factor in an increase in the UN's Food and Agriculture Organisation's food price index last month. Sugar prices rose by 2.4% last month as the market reacted to fears of a delayed harvest in Brazil. For the year ending 31 March, the global sugar harvest is expected to be higher but concerns over production bottlenecks have pushed up prices.
Meanwhile, reports yesterday said the price of palm oil has hit a one-year high amid concerns over the soybean crop in South America. A lower soybean harvest could mean less soyoil produced, pushing up the price of a substitute commodity like palm oil.
Elsewhere, European food manufacturers are facing higher egg prices after the introduction of new EU rules on animal welfare. Thirteen EU states failed to comply with legislation that outlawed the use of conventional battery cages for hens and eggs produced from those cages cannot be traded throughout the bloc. The consequent reduction in tradeable eggs has meant wholesale prices have in some cases doubled, hitting manufacturers of products from cakes to quiches.
Eggs and oils were key drivers of a surprise rise in food inflation in the UK in February. The BRC-Nielsen Shop Price Index showed food inflation of 4.2% in February, compared to 3.7% in January.
In the round, commodity inflation is unlikely to hit the levels seen in 2011 but the signs do point to ongoing significant pressure in parts of a manufacturer's commodity bill.
And, as well as monitoring the data on commodity futures, packaged food manufacturers need only read some of the comments made by ingredients suppliers in recent days.
Last week, global food ingredients manufacturer International Flavors and Fragrances said it expected to have to again look to push through price increases to its customers in 2012.
The US-based company, which makes flavours used in sweet, savoury and dairy products, said it expected a "modest" rise in commodity costs in 2012 following a year of inflation in raw material prices last year.
"We do expect raw material cost inflation to be in the low single digits in 2012 and therefore we will continue to have pricing discussions, pricing increases with our customers," CEO Doug Tough told the Consumer Analyst Group of Europe conference in London last week.
The following day flavours rival Givaudan insisted it was confident it could push price increases through to its food manufacturing customers despite a hike in raw materials costs hitting profits over the past year. The fall in earnings, combined with ongoing pressure on commodity prices, is likely to have strengthened Givaudan's resolve to try to pass on the higher costs.
UK food ingredients manufacturer Macphie told just-food this week that 2012 would be "another very difficult year" amid the high price of sugar and eggs.
To justify price increases, ingredients firms would argue they work hard to add value to their ingredients and respond quickly to changing consumer trends and regulatory frameworks. The investment in R&D and technology may also give ingredients suppliers the edge on competition - meaning food manufacturers could find it difficult to switch supplier despite the apparent fragmentation in the sector.
Through that investment, food manufacturers should be able to demand added value for their products from their customers - the consumer - although, in the current economic climate and with competition among retailers remaining intense, that is easier said than done.
Competition is fierce in markets around the world - manufacturers of all kinds have complained of the pressure of the rivalry between Australia's two largest retailers Woolworths Ltd and Coles, for instance.
The UK is another very competitive market. The latest UK retail data from Kantar Worldpanel today showed that Asda, the country's second-largest retailer and local unit of Wal-Mart Stores, had seen its share of the country's grocery market had reached a record level. In the 12 weeks to 18 March, Asda accounted for 17.9% of UK grocery sales thanks largely to the impact of its acquisition of Netto's UK stores last year. While Asda thrives, Tesco continues to suffer, with its share of the market falling four percentage points to 30.2%. With the country's largest retailer battling to halt the erosion in its market share, with its competitors increasing or holding their share and with consumers lacking spending power, this year is set to be another tough one for the grocery sector - not least for manufacturers, squeezed on one side by ever-demanding retail customers and continued pressure from commodities.
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