Goldman Sachs has upgraded its stance on European food producers to neutral from cautious.

The investment group said that its Pan-European Food Producer universe has underperformed the Pan-European market by 3.7% so far this year, and by 5.1% over the last 12 months.

It went on to add that despite an increase in absolute share prices, large cap stocks Nestle, Unilever and Cadbury have underperformed the market by 5% in 2006. Of the larger cap food companies, only Danone has outperformed, Goldman added in a research note.

“After three years of cost and pricing pressure, we believe that the trading environment for the food stocks is now easing. In addition, the sector has traditionally outperformed as US growth has slowed, and evidence of a US slowdown is currently building.

Goldman believes that the risks of being underweight have risen and so upgraded its Food coverage view to Neutral, due to a strong spurt in economic growth shifting investors away from defensives and increased pricing and cost pressure.

Unilever remains on Goldman’s Pan-Europe Conviction Buy List, because of better pricing at the company and easing cost pressures, which it said should help management demonstrate that it is turning the business around.

On the other hand, Cadbury was Goldman’s ‘best sell idea’. The bank said: “We believe lacklustre 2006 earnings and an uncertain trading outlook for UK confectionery and US beverages are likely to hamper relative performance through the first half of 2007. We maintain our Sell rating on Cadbury.”