Blog: Dean BestNew year, new pressure on commodity costs

Dean Best | 17 December 2009

After 2008's peak in commodity prices and 2009's subsequent falls, are we seeing signs that 2010 will herald the return of more expensive raw materials?

The EU has issued data that shows dairy prices have recovered since this summer and have risen during the autumn and into December.

The European Commission's numbers tally with trends that Fonterra, the world's largest dairy exporter have been talking about for months and, on Monday, the New Zealand dairy giant lifted the price it pays farmers for milk solids.

There are signs that sugar prices are rising with reports overnight pointing to lower crops in Brazil and suggesting that there will be pressure on supplies in Central America and Thailand.

And this week has also seen cocoa prices hit new highs amid concerns of production shortfalls.

Today, Ken Powell, boss of one of the world's largest food companies, General Mills, was walking analysts through a set of robust quarterly financial numbers from the business - but he hinted that he saw commodity cost pressure on the horizon.

"We expect to see a return to some inflation in some input markets," Powell said. "While input costs are currently favourable, we do not expect that to be a long-term trend. We believe we'll seen renewed input cost inflation in fiscal 2011."

However, while Powell and General Mills expect to see commodity cost pressure resume in the second half of 2010, the company said there are already signs that costs are rising - and having an impact on business strategy.

"We've seen dairy prices ease up and coincidentally we've seen some of the promotional activity in the yoghurt category ease off," the head of the Yoplait maker said.

With consumer confidence in many markets remaining fragile, expect the battle over pricing between manufacturers and retailers restart in earnest next year.

Retailers will be fighting to keep prices low; food makers will want to push through rising commodity costs. Some will win, others will lose.


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