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August 9, 2010

Best bits: climbing raw-material prices raise concerns

The spectre of rising raw-material costs loomed large for some food makers last week after Russia's decision to temporarily ban grain exports led to a surge in the price of wheat.

By Dean Best

The spectre of rising raw-material costs loomed large for some food makers last week after Russia’s decision to temporarily ban grain exports led to a surge in the price of wheat.

Wheat prices, which climbed to a 22-year high on Monday (2 August), jumped again after Moscow, which has seen Russia face its worst drought in over a century, banned any exports of grain from 15 August to the end of the year.

Some commentators promptly speculated that the food sector could see a return of the spike in commodity costs it saw in 2007/8. Premier Foods plc, the UK’s largest food maker and owner of Hovis bread, warned price increases were “inevitable”.

However, despite Russia’s status as one of the world’s largest wheat exporters, excess production in China and the US means it remains uncertain whether any spike in the price of the commodity will be prolonged.

Nevertheless, the news around wheat was a reminder of that, over the long term, the only pressure on food prices is almost certain to be upwards. Climate change, rising populations and the scarcity of arable land are just three factors that mean food prices are almost certain to rise. The food industry is unlikely to see a return of the kind of inflation it saw three years ago but, in the years ahead, manufacturers and retailers will increasingly face pressure on their raw-material bills.

Unilever, the Anglo-Dutch conglomerate behind food brands like Knorr soup and Wall’s ice cream, cited commodity-cost pressure as one reason for its caution about growth in the second half of 2010 when it posted its first-half numbers last week.

That cautious outlook compounded concerns about Unilever’s performance in Western Europe, where the company’s underlying sales fell during the three months to the end of June.

Given Unilever, which sells a range of household and personal-care products like Dove soap and Lynx deodorants, generates the bulk of its sales in Western Europe through its food business, questions were asked about the company’s food portfolio. Andrew Wood, an analyst at Sanford Bernstein, highlighted the “disappointing” performance of Unilever’s food business, arguing that “food growth was weaker than expected and the full cause of the top-line under-delivery in Q2”.

With growth in Western European markets set to remain modest at best in the medium term – a fact acknowledged by Unilever boss Paul Polman when he announced the company’s first-half figures – it is critical the company looks to expand its food business in the world’s developing markets, something Polman also reflected upon last week. “We need to accelerate the presence of our savoury business in the emerging markets,” Polman noted as he emphasised Unilever’s belief that it will be developing markets that drives the group’s expansion in the years ahead.

One company that saw its shares fall as Russia announced its temporary ban on grain exports was Kellogg. However, the big news for the business last week was its move to boost its health credentials in the UK. The cereal giant announced plans to cut the sugar in the Coco Pops brands it sells in the UK and unveiled the launch of a healthier chocolate cereal – Choc N’ Roll.

Kellogg is often at the centre of criticism from campaigners who see the food industry as part of the cause of the UK’s obesity crisis and, even as it launched Choc N’ Roll, the response from consumer groups was one of faint praise.

We sat down with Kellogg UK managing director Greg Peterson on the day the company announced its Coco Pops plans and the American executive seemed unconcerned about the criticism that can be directed the cereal giant’s way. Kellogg’s moves were, he insisted, driven by consumer demand and not a desire to placate campaigners.

However, the reformulation programme was, once again, proof that food manufacturers are reacting to pressure from government, campaigners and consumers for healthier products. Even amid the downturn, health and wellness has been a key driver behind innovation and those that react quickest and go furthest are sure to reap the rewards when recovery returns.



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