Wheat Price Spike Exacerbates Cost Inflation Challenges for Food Companies

| About: DB Agriculture (AGA)

Fitch Ratings says the recent surge in wheat prices, which have resulted from expectations of a poor Russian harvest, could create a new wave of cost inflation for global food and beverage companies. However, the impact is likely to be limited in the near-term.

Given the limited prospects for new price increases against a backdrop of already anemic economic growth in developed countries, the agency believes that the simultaneous expansion of volumes and margins by all food producers may be challenging unless manufacturers scale back operating costs in other areas.

“While the effects of this renewed cost inflation will vary by sector and geography, Fitch expects small food companies with narrow product portfolios around bread, bakery or pasta businesses to feel the most pressure,” says Pablo Mazzini, Senior Director in Fitch’s retail and consumer team.

Inflation-driven food price increases could force consumers to reduce consumption or increase their transition towards cheaper alternatives, particularly in developed economies, as has already been seen in Western Europe. However, larger and more diversified packaged food producers will likely be able to sustain profitability in the near-term as they typically hedge a portion of their commodity input costs a few quarters in advance and by pursuing multiple supply sourcing. As commodity costs represent around 20% of a typical packaged food company’s total operating costs, the impact of higher wheat prices is not likely to be felt for at least several months. Furthermore, companies may use cost savings from productivity initiatives, innovate via product reformulations and/or raise product prices to help offset higher costs.

Excerpted from Wheat Price Spike Exacerbates Cost Inflation Challenges for Food Companies (Premium)