A cheery thought for a Monday morning: crude oil could soon hit $100 a barrel.
Investment banks Goldman Sachs and JP Morgan have both issued forecasts in the last week that predict the cost of the commodity could break the $100 barrier by the end of next year. JP Morgan has said growing demand from China and other fast-growing emerging markets, plus restocking from France after the end of the industrial action that has hit the country’s fuel supplies, could push the price of crude to $100 before the fourth quarter of 2011.
A worldwide economic recovery would also increase demand for oil and, let’s face it, many in business would gladly take an enduring upturn in economic conditions, particularly in the US and western Europe. However, the prospect of increasing oil prices – the commodity is trading at around $80 a barrel at the moment – will cause concern at a time when trading conditions are fragile, consumer confidence is weak and many in the food industry are facing upward pressure on the price of other commodities.
Grain is causing grumbles from food manufacturers across the spectrum. The poultry sector is one facing soaring cereal costs and Groupe Doux, Europe’s largest poultry processor and, in an interview with just-food last week, CEO Guy Odri again urged retailers to increase prices on its products.
Discussions between Doux and three unnamed French retailers – who make up 40-50% of the local market – continue but it was a sign of the depth of Odri’s feeling on the issue and, perhaps, the pressure his company and the poultry sector is facing, that he went public on what often is a subject that stays behind closed doors.
Elsewhere, it emerged last week that General Mills, the US food group behind cereal brands like Big G and Cheerios, has told its US retail customers that it will up the list price on selected lines next month. Such a strategy is a risk, particularly in what remains a fragile economic climate. Retailers can reject requests from suppliers to raise prices and manufacturers can find their products delisted.
This has reportedly happened to Premier Foods plc, the UK’s largest food group, which has seen Tesco decide not to stock 12 Hovis lines after turning down the bread maker’s appeal for higher prices. With consumer confidence remaining weak, retailers will argue that they cannot push through price increases, and manufacturers face a tough task convincing their customers to share the hit to margins that higher commodity costs bring.
We are now in the period when food manufacturers the world over issue their third-quarter results, so expect more light to be shed on the growing pressure commodity costs is exerting on processors – not least from Premier, which issues a trading update on Thursday. Last week, US confectionery giant Hershey said it expected input costs to be higher in 2011 and issued profit forecasts for the year that disappointed investors.
With retailers playing hard ball, some food makers may be forced to put up with their higher commodity bill – but some may only be able to withstand that pressure for so long. In the past, manufacturers seeking respite from higher raw-material prices could have turned to the banks but, due in part to regulatory pressure, lenders are not as open with their cash as they once were.
All this in turn creates a fertile landscape for further consolidation in the food sector, with weaker players seeking solace in a larger company – and the bigger firms looking for acquisitions to boost their bargaining power with retailers.
As one leading food-industry executive told just-food at the SIAL exhibition last week: “The price of wheat is going up, corn prices are going up, milk prices are going up, all the basics are going up and still the market is squeezing down. That will at some moment explode. It is really a dynamic cocktail. When it will happen?