Mounting concern over the direction of commodity prices cast a pall over producers of fodd and other household staples in the second half of 2010. A wildfire in Russia saw wheat prices spike, speculation and civil unrest in the Ivory Coast put a rocket under cocoa, and oil - a key agricultural production cost and a direct input of many household products - rose steadily to within a whisker of $100 (£63) a barrel once more. This pressure isn’t likely to ease any time soon, as the La Niña weather system continues to wreak havoc on major producing regions such as Brazil and Australia, pushing the UN food index to the highest level since records began in 1990.
In the short term, producers weren't too badly affected, having hedged a significant chunk of raw material requirements. But those hedges will unwind throughout the year, and recovering additional input costs is likely to prove an ongoing struggle. And while those with strong, tier-one brands will be able to more easily command higher prices, the reality is that even for the likes of Unilever or Reckitt Benckiser volumes have proved highly price-sensitive. But as PZ Cussons demonstrated, product innovation remains an effective way of keeping volumes ticking over without giving up too much pricing through promotions.
Certainly, a reduction in promotional activity would be welcome respite for private label suppliers which, with lower gross margins, suffer disproportionately as input costs rise and which can't increase prices without the consent of supermarket customers. And while McBride - which makes household goods for supermarkets - was able to recover an 8 per cent increase in manufacturing costs last year, it has consequently lost volume in its core western markets as a result of promotional activity from branded suppliers, which has reached unprecedented levels in recent years.
That may be unsustainable in the face of rising raw material costs, though, and any significant economic weakness in Europe or price increases from branded suppliers could prompt a return to trading down. The direction of pricing will be a key factor in the performance of the sector this year - although one company, Cranswick, is enjoying a much more stable inflationary environment. Low pig prices mean pork remains in high demand, and investment in capacity means that the company is poised for further growth.
But with western households set for a more frugal 2011, emerging markets will also be an important source of growth this year. Sausage skin maker Devro will continue to benefit from its Asian exposure, where growing populations with rising incomes are demanding higher-protein diets. Tate & Lyle’s new chief executive Javed Ahmed is also looking to increase the food ingredients group’s exposure to these high-growth regions as part of a recovery strategy that has already seen it sell off its commodity sugar operation to focus on the sale of value added ingredients. Indeed, 50 per cent of Unilever’s sales now come from emerging markets and it's aiming to increase that to 70 per cent, making it the pick of the sector for many analysts.
|COMPANY||PRICE (p)||MARKET CAP (£m)||PE RATIO||YIELD (%)||1 YEAR PRICE CHANGE (%)||LAST IC VIEW|
|ASSOCIATED BRITISH FOODS||1,126||8,914||15.6||2.0||31.0|
|TATE & LYLE||542||2,535||13.7||4.2||30.8|
|RECKITT BENCKISER GROUP||3,425||24,860||15.4||3.1||5.7|