Commodities to rise but you’ll cope, analyst tells industry

By Jess Halliday

- Last updated on GMT

European food manufacturers will experience commodity inflation in the second half of 2010 but it will be more manageable than it has been in the past, predicts an analyst.

Turbulence in commodity market has put the entire food supply chain under pressure in recent years, as suppliers have had to pass some of the extra expense down to their customers so that, ultimately, consumer prices had to bear higher prices for some products at the supermarket check-out.

Memories of the extreme spikes seen in late 2007 and early 2008 are still vivid, and have left wary manufacturers on the look out for warning signs. Ingredients companies, too, try to predict commodities that look likely to soar, so they can propose less vulnerable alternative ingredients.

In the last month concerns have been raised over bread prices after Russia decided to temporarily ban wheat exports following drought that reduced production. As a result the FAO has revised downward its forecast for 2010 world wheat production levels, reporting that wheat market dynamics drove international food prices up in August by 5 per cent - the biggest month-on-month increase since November 2009.

Andrew Wood, senior research analyst at Bernstein and Associates, is warning that commodity inflation will be seen across the board in the second half of this year. However on aggregate, he expects the hikes to be more manageable this time around.

Although some commodities like wheat, milk and coffee have risen significantly in the last month, overall inflation in H2 2010 and 2011 will not be extraordinary – and much will be off-set by pricing, volume leverage and cost savings. Certainly many firms have already put new systems for tightening their belts in times of strife, so it seems they may have learned some lessons back in 2007.

Of the major manufacturers, Nestle and Unilever are expected to do better than Danone, which was already taking a commodity hit in H1 (Danone benefited from commodity deflation around 6 months ahead of the others in 200).

“We believe we are seeing a return to more ‘normal’ conditions for the [European food] group… the return of commodities inflation but also the return of positive pricing, and this should allow for continued healthy operating performance to the medium term, ”​said Wood – but he added “although we do worry about Danone over the next 6 to 12 months”.

Commodity watching

Wood’s commodity predictions are based on Bernstein’s Food Commodities Index, which tracks the price of 14 ingredient commodities, including milk, coffee, cocoa and sugar, and 6 related to packaging, such as crude oil, aluminium and PET.

He has observed that although 2007/8 was a grave period, they were followed by the first year of deflation in a decade in 2009.

Moreover, the worrisome headlines on wheat prices look to be somewhat overblown. Although the index shows wheat to be up 27% since the low of February 2009 and up 12% since this time last year, it is actually down 2% since January 2010.

“While admittedly it is still a very early estimate, our index indicates that 2011 commodity inflation would be +2% based on maintaining commodity prices at current levels,”​ said Wood.

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