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Food companies keep prices high

Grain and soybean prices have fallen by about 50 percent since their summer highs. But don’t expect grocery prices to drop anytime soon.

Food companies are typically quick to pass along higher commodity costs on the way up, slower to reduce prices on the way down. That could bring a continuing run of profits for packaged-food companies even as consumers add higher food prices to the pressures they face from falling housing values and shrinking credit.

Retail grocery-store prices leapt 7.6 percent last month from a year earlier, driven in part by a 14.2 percent rise in cereal and bakery prices, the Bureau of Labor Statistics reported Thursday. The average price of ground beef in the U.S. increased to $2.41 a pound last month from $2.37 a year earlier.

The U.S. Agriculture Department expects food prices to increase as much as 5 percent next year, following an estimated 6 percent gain this year.

In March, the price of a 20-ounce loaf of Sara Lee Soft & Smooth Classic White bread was $1.97 at a Wal-Mart Supercenter in Waukegan, Ill. Now it’s $2.24.

Nestle SA, the world’s biggest food company by revenue, increased global prices an average 5.4 percent in the first half. In the U.S., Canada and Latin America, the figure was 8 percent. But the Vevey, Switzerland, company doesn’t plan on big cuts now that costs are falling.

“Prices might come down a little, but I don’t think it will be anything spectacular,” Nestle Chairman Peter Brabeck-Letmat said in an interview.

Hershey Co. Chief Executive David West told investors Thursday that consumers can expect to see higher prices on its chocolates, including for products for which supermarkets run promotions.

The Hershey, Pa., candy maker in August announced a 10 percent price increase across its U.S. product line. Mr. West said Thursday that while the cost of such ingredients as milk, cocoa and sugar are below their peaks, they are still higher than they were a year ago. He said he expects Hershey’s commodity costs to increase more than $200 million next year from 2008.

There are deceptively simple reasons that food prices remain high even as ingredient costs fall. “People still need to eat. I don’t know how else to say it,” said Joseph Victor, vice president of marketing at Chicago-based commodity research company Allendale Inc. Many consumers aren’t as savvy about the costs of food ingredients as they are, say, about the price of oil versus the price at their corner gas station.

Also, some food companies’ costs remain higher than this week’s commodity prices because the companies locked in contracts this summer when, for example, corn was selling at more than $7.50 a bushel. This week, corn dipped below $4 a bushel for the first time since last December. It closed Thursday at $3.84 a bushel.

“The impact of higher priced corn is continuing to work its way through the value chain and will continue to be reflected in higher grocery prices for some period,” said Scott Faber, vice president for federal affairs of the Grocery Manufacturers Association, a trade group.

Over the past two years, prices for corn, soybeans and wheat more than doubled as global demand for biofuels soared and rising demand for grain-fed pork and beef climbed in China, India and other developing countries. Food companies raised prices on everything from cereal to ketchup, frequently attributing increases to higher commodity costs.

But as the credit crisis has intensified, crop prices have fallen along with the stock market and prices for other commodities.

Some investors worry that a slowing global economy will sap global demand for U.S. agriculture exports.

But so far, there’s little evidence of that happening. The Federal Reserve’s so-called beige book survey of regional economies said Wednesday that “exports continued to boost agricultural demand.” Since Sept. 1, U.S. soybean exports to the top-five importing nations are up about 6 percent from a year earlier, said Mr. Victor, of the Allendale research firm.

Analysts say food companies with strong brands tend to have the strongest pricing power, and point to General Mills Inc., H.J. Heinz Co. and Kellogg Co. as food makers who have raised prices without losing market share.

Food companies have outperformed the broader stock market in the last three months, with their shares down 18 percent versus a 29 percent decline for the Dow Jones U.S. Total Market Index.

Soleil Securities analyst Edgar Roesch estimated that General Mills’ profit will jump to $4.18 a share next year from $3.81 a share this year and sees Kellogg’s profit rising to $3.32 a share from $3.02 a share.

Nestle’s earnings before interest, tax and amortization should increase 11 percent to 17.6 billion Swiss francs ($15.5 billion) next year from 2008, according to forecasts by Sanford C. Bernstein analyst Andrew Wood.

Earnings at Hershey, which has struggled against Mars Inc. and other rivals, aren’t as strong. The company expects sales growth next year of just 2 percent to 3 percent as lower volume partially offsets higher prices. Credit Suisse analyst Robert Moskow estimates that Hershey earnings will rise just a penny next year, to $1.85 a share.

Some supermarket chains have seen profit growth slow or decline because of food inflation and the weak U.S. economy. Supervalu Inc., Safeway Inc. and Belgium’s Delhaize Group are among grocers that have cut profit or sales forecasts.

Although the grocers generally pass along higher prices from vendors, some shoppers have switched to store brands and other lower-priced goods. Wal-Mart Stores Inc. and Kroger Co., the No. 1 and No. 2 U.S. food retailers by sales, have fared better than most.

Mr. Moskow said moderating commodity prices should help food companies expand profit margins as in past recessionary cycles. “They generally held onto the price increases they had taken while enjoying the benefit of slightly lower input costs,” he wrote in a recent research note.

While prices are falling now, that could change as world crop supplies remain tight. Flooding or drought somewhere in the world could ignite a price rally of the sort seen in June, when flooding in the Midwest pushed corn and soybean prices sky high.

Uncertainty among farmers also could keep prices high. A combination of lower crop prices and high prices for seed and fertilizer could discourage farmers from taking risks in the spring, causing them to scale back planting.

Meat prices could rise sharply because livestock farmers have culled herds to cope with higher feed prices. And demand for corn-based ethanol will increase next year as federal law requires the oil industry to use 10.5 billion gallons of ethanol, up from nine billion gallons this year. That, too, could push corn prices higher.

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