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Inflation threat to food producers

Created:
13 December 2007
Written by:
Nathalie Olof-Ors

Food prices have soared in 2007, rising at their fastest rate in decades, but could face a second wave of inflation after the US Department of Agriculture flagged a significant reduction in grain stocks.

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In its monthly statistics, the USDA said that this year ending stocks - at 280m bushels - were at their lowest level in the last 60 years, while soybeans stocks fell by 68 per cent from last year. While corn stocks are also projected to be down, the USDA now expects record high exports on strong demand from Asia.

The US is the world largest exporter of grains, so these statistics are likely to lead to another round of price increases in grains on the global commodities markets, and have a severe knock-on effect on dairy and meat prices, as grains are used extensively in animal feedstocks.

The UK food industry, which already had a to go through tough negotiations with retailers this year to recover higher raw material costs, faces more cost pressure. As Julian Hardwick, analyst at ABN Amro, points out, "the blue chip companies are still in a better position to pass these inflationary pressure to customers".

These renewed concerns on raw material prices are eroding the defensive qualities of food producers at a time when the market is increasingly on the look out for safe havens. The issue is of particular concern for producers of supermarket own brands such as Northern Foods. But Mr Hardwick considers that companies such as Premier Foods and Dairy Crest have been oversold on these raw materials concern, and retains a buy recommendation on these shares. Demand for food is relatively price-inelastic; it's just a question of how much of the cost increases can be recovered from consumers.

Still, what might appear as a further blow for some listed companies creates new opportunities for others. The well-publicised rise in food prices is creating a favourable market environment for producers of soft commodities, who are now flocking at the gate of the London Stock Exchange. This week, New Britain Palm Oil has applied to be admitted directly on the Official List. The palm oil producer and refiner, with operations in New Papua Guinea and Solomon Islands, hopes to raise £88.9m, and says it has received "a great deal of interest from investors."

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