Blog: Food pays the price for credit crisis
Dean Best | 6 October 2008
"Everyone is leveraged - companies are leveraged, governments are leveraged and individuals are leveraged."
These were the words of one US analyst to just-food last Thursday evening as we discussed the impact the global credit crisis is having on the food industry.
The words hammered home just how bleak the situation is right now. The US Congress may have finally approved the US$700bn bail-out plan designed to kick-start the country's – and by extension the world's – frozen financial markets but it would be foolish to assume that the problem is now solved.
It would be equally foolish to assume that the food industry is immune from the global economic turmoil. Even as recently as a few months ago, commentators were describing the food sector as "recession-proof". "Everyone has to eat," was the war-cry. And although that bullishness has become more qualified – the food industry has since been described as "recession-resistant" – it would be dangerous to think this crisis starts and ends in Wall St and derivatives.
In our news series on the global economic landscape, we looked at one industry reeling from the impact of the credit crunch – the meat sector. Meat processors have had a wretched 12-18 months as commodity costs have soared but, for some, the credit crisis could deal a fatal blow.
US poultry giant Pilgrim's Pride has only secured the liquidity to operate until 28 October and some analysts rate the likelihood of bankruptcy at 50:50.
Shares in Smithfield Foods, meanwhile, have been hit as rumours have swirled over its future. The hog and pork processor has insisted it has adequate liquidity but is it uncertain whether that will stop the speculation. As one analyst told us: “The meat-packing business is not a good business to be in right now; businesses aren't in great financial health.”
Aside from the financial problems of the more highly-leveraged companies, the average debt-laden shopper has been changing its habits accordingly for months. Last week, we saw yet more evidence of that trend in the UK, with Tesco's robust half-year figures and another disappointing performance from Marks and Spencer.
In some quarters, M&S's second-quarter figures were met with something of a sigh of relief after July's profit warning but question marks remain over the business, particularly in food, which, according to some estimates, has seen margins hit hard in recent weeks.
It will be interesting to see how Sainsbury's – a grocer that sits somewhere in the middle of Tesco and M&S on the price spectrum – has fared in recent weeks when it publishes its latest update on Wednesday (8 October).
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