Commodity squeeze hits food giant

- Last updated on GMT

Related tags: Cheese

Rising commodity and ingredients prices continue to hit the global
food chain with US food giant Kraft the next in line to be hit by
price pressures suggesting that despite reasonable fourth quarter
figures, the soaring costs are likely to have an impact in the near
future.

The Illinois-based maker of Ritz crackers, Bird's Custard and Philadelphia cheese brands said its US business was also hurt by the low-carb diet craze. Kraft earned $698 million, or 41 cents per share, compared with $949 million, or 55 cents per share in the 2003 period.

" Costs for several commodities were up in the quarter, with the most significant increase in dairy costs. Second quarter average cost for US barrel cheese was up 70 per cent versus the second quarter of last year and up 53 per cent versus the five-year average,"​ said the number one US food firm.

The price squeezes resulted in increased costs of about $200 million compared to the year before.

In response to the higher costs, the company said it had increased prices on its different varieties of US cheeses by 5 to 15 per cent.

"However, the pricing actions were not designed to fully offset the higher costs because of the company's expectation that cheese costs would not remain at historical highs. On the quarter, the price increases offset approximately one-half of the higher costs,"​ added the firm.

Kraft joins fellow US food supplier General Mills that warned earlier this month soaring commodity prices would impact the bottom. And this despite the firm reporting a 20 per cent rise in net profit to $278 million (€228m) for the fourth quarter ended 30 May.

"Our business plan for 2005 includes commodity costs that are roughly $165 million higher than last year's, along with increases in health-care and restricted stock expense,"​ said CEO Steve Sanger in the earnings report.

Commodity prices are high for cereals because the world has lost its grain - corn, wheat, soybean - buffer zone. In each of the last four years total grain production has fallen short of consumption, forcing a drawdown of stocks. As such, soybeans have recently hit 15-year highs and wheat and corn 7-year highs. Wheat, rice, corn and soybeans are all key grains used for sourcing food ingredients found extensively in food formulations by manufacturers such as Kraft and General Mills.

These price rises are contributing to higher food prices worldwide, including in China and the US, the largest food producers. The American Farm Bureau marketbasket survey, which monitors US retail prices of 16 basic food products in 32 states, recently showed a 10.5 per cent rise in food prices during the first quarter of 2004 over the same period in 2003. Price rises range from a 2 per cent rise in the price of milk to a 29 per cent rise for eggs.

Related topics: Commodities, Pricing Pressures

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