Increased raw material costs may lead to higher food prices - Brief Article
Raw-materials costs of all kinds are heading higher and it is likely lead to increasing food prices, according to Deutsche Bank analyst Eric Katzman. Food companies have already been hit by rising costs for pensions and benefits; now these companies are seeing large increases in the cost of packaging, transportation and raw materials such as basic grains and oilseeds, he said. “We believe food inflation I likely as processors pass along prices,” Katzman said.
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Although wheat prices are down 25% over the past three months, spot prices are climbing on strong international demand for U.S. wheat because drought conditions have hurt some wheat crops. Speculation that China will stop exporting corn in January is driving spot prices for corn higher, he said.
Deutsche Bank’s packaging analyst Dan Khoshaba expects packaging costs will be up 6% to 8%, while transportation analyst John Barnes forecasts transportation costs will climb 2% to 6% next year.
According to Katzman, it still unclear whether any price increases made by the food companies will be effective in completely offsetting cost-margin pressure. As a result, the companies will have to rely on more productivity, cost savings and better return on promotional investment in 2004 and 2005, he said.
With this in mind, Katzman thinks those companies in highly concentrated, rational categories should be okay in such an environment including candymaker Hershey Foods Corp., spice and seasonings maker McCormick & Co., snack and beverage company PepsiCo Inc. (PEP), and chewing gum maker Wm. Wrigley Jr. Co.