For those watching commodity prices, the news took a turn for the worse on Friday.
The US government again cut its forecast on corn yields as the impact of the worst drought in the country for 50 years becomes more obvious. Washington said the US corn yield is set to be the lowest since 1995-96, sending futures to a record high in Chicago. The US also cut its forecast for soybean production and the revised predictions have pushed up wheat prices.
The new forecasts from the US followed a UN report on Thursday, which said food prices increased 6% in July, thanks to the hot weather in the US, fears wheat production in Russia could be lower and rain in Brazil that has hit sugar production.
All the signs point to another year of raw material pressure for food manufacturers. The industry would have been hoping for some respite from the pricing pressure of 2011 but there seems little prospect of that.
True, we are not seeing the cost pressure of say, 2008, when oil prices were also high and demand from China and India was stronger. However, with consumer confidence in many Western markets remaining low and growth in some of the emerging markets dampened, it will prove tricky finding a way to successfully pass on price increases to retailers and consumers.
Last week, companies from US meat giant Tyson Foods to UK bread manufacturer Premier Foods plc told investors they would pass on price increases. Retailers are unlikely to turn around and reject outright moves to pass on higher commodity costs but suppliers need to negotiate carefully – Premier is one company that knows all too well the perils of a pricing dispute with a major customer.
Some may feel the anxiety is exaggerated. Dean Foods, the US dairy giant, acknowledged dairy costs were likely to increase but insisted the impact could be “less extreme” than some analysts predict.
Dean Foods was reflecting on its commodity cost outlook as it reported its half-year results last week, numbers that came alongside an announcement of plans to list part of its soy and organics arm. The company plans to list 20% of what will become WhiteWave Foods Co. by the end of the year. Analysts had mooted such a move for a number of years but Dean Foods said it wanted to ensure both companies’ balance sheets were strong enough before proceeding.
WhiteWave will market brands including Horizon Organic, Silk and Alpro and it is a part of Dean Foods’ business that has been growing rapidly. Of course, in time, WhiteWave’s position on the New York Stock Exchange could lead to it becoming a takeover target and one analyst has already touted Danone, Nestle or General Mills as potential buyers.