Unilever Manifests Realities of Inflation

Includes: BG, CZZ, GIS, INGR, K, POT, UN
by: Emerging Money

Global food and household products maker Unilever (NYSE:UN) has "never seen" more volatile commodity markets and is raising its prices to compensate. Expect more of this.

Unilever is looking to pass on rising costs of essentially all raw materials, from milk and tea on the food side to tallow and petrochemicals on the soap side of its business.

The price hikes will be effective "immediately," but as yet their extent remains nebulous. Tea and soap are both obvious candidates for a price increase, since the U.K. press has bemoaned the fact that tea growers have raised their prices 30% while oil - a key component of detergents - has also bounced back up to pre-recession levels.

Thanks to the recession, Unilever managed to reduce its aggregate pricing 1.2% last year but still generated an equivalent profit by boosting revenue 5%.

Even vegetable oil is surging in price, both due to rising agricultural costs and the fact that in some parts of the world it is now being used as fuel as well as in cooking.

Since food prices are driven by both transportation costs and the boom in raw soft commodity markets, they will likely bear the brunt of Unilever's inflation-driven (and inflation-driving) price increases.

Good time to think about the food trade again. Think soy producers like Bunge (NYSE:BG) and sugar producers like Cosan (NYSE:CZZ) and Corn Products (CPO), not to mention ETFs like CORN. Also, fertilizer (think potash) - Potash Corp. (NYSE:POT) is the giant in the room here.

Unless other processed food manufacturers follow Unilever's lead, expect their profits to sink. Watch General Mills (NYSE:GIS) and even Kraft (NYSE:K) carefully:

Disclosure: No positions.