By Matt Andrejczak
Food companies are fighting an uphill battle when it comes to
overcoming elevated prices for corn and other staple ingredients,
with Kraft Foods Inc. (KFT) standing out as a rare example of a
company covering its ballooning commodities bill.
Kraft Foods, maker of Oreo cookies, Oscar Mayer deli meats and
other well-known brands, said May 5 that it was able to raise its
product prices by 3.7%, enough to cover a 7% jump in input costs,
which were $375 million more than the same 2010 period.
Kraft "may take the prize as the only [food] company to have
offset inflation via pricing" in the first quarter, said Barclays
Capital analyst Andrew Lazar. "To the extent that pricing can
continue to run in line (or slightly ahead) of commodity costs,
Kraft should have all the more flexibility to continue to reinvest
against its brands and support volume growth."
This might further help Kraft's stock, which is up 7% in the
past month, compared with a 2% gain for the Dow Jones Industrial
Average. Back when commodities prices took off in 2007-2008, Kraft
struggled to keep pace with inflation as its brands lacked pricing
power, Lazar pointed out.
Profit margins and volume growth are at risk for food companies,
especially if grain prices and raw material costs stay at elevated
levels and if job growth remains stagnant. Several companies,
including Sara Lee Corp. (SLE) and Healthy Choice maker ConAgra
Inc. (CAG), are still raising their prices.
It's a tricky situation. When companies raise prices, especially
during a prolonged economic slump, there is concern about what
happens to demand.
"We expect there to be some adverse consumer reaction, just
because there's a segment of population that's under pressure,"
Kellogg Co. (K) Chief Executive John Bryant said in a recent
conference call. "At the same time, there's a segment of the
consumer population that's doing quite well and we see that in the
growth of Kashi Cereal."
Kellogg, maker of Special K cereals and Cheez-It crackers, is
projecting flat volume growth for 2011. The Michigan company said
input costs will amount to 7%-8% of its cost of goods sold this
year.
Meat producers--huge buyers of corn and soybean meal to fatten
chickens and pigs--are feeling the brunt of the spike in feed
grains, not a reassuring sign for consumers who already have been
paying higher prices for steaks, sausages and ground beef at the
supermarket.
Tyson Foods Inc. (TSN) said its grain purchasing costs ran $82
million higher for its fiscal second quarter that ended April 2,
while chicken producer Pilgrim's Pride Corp. (PPC) said its grain
bill was $188 million more than the same 2010 quarter.
Unlike 2009 and 2010, food companies are paying a higher tab for
grains, edible oils and fuel as older hedging positions have
expired. Companies use hedges, which last six months to a year
depending on the commodity, to protect themselves against swings in
the futures market.
Over the past 12 months, corn prices have spiked 80% in the
futures market, while wheat has surged 54%, soybeans, 37%, and
oats, 70%.
Sara Lee, which besides its namesake breads makes Ball Park hot
dogs and Jimmy Dean breakfast sandwiches, said its input costs are
running $650 million higher than 2010 through the first nine months
of its June 2011 fiscal year. Sara Lee in August 2010 had figured
its tab for ingredients and fuel would be $200 million higher
year-over-year.
Ralcorp Holdings Inc. (RAH), one of the nation's biggest makers
of foods sold under store-brand names, said its commodities tab for
its fiscal second quarter ended March 31 went up $32 million over
the same 2010 period.
It projects a $200 million increase for its fiscal 2011 year
that ends in September.
Chocolate and coffee makers are in the same boat.
Hershey Co. (HSY) said it paid $33 million of increased costs
for its raw materials during the quarter. It recently implemented
price increases.
Starbucks Corp. (SBUX) said its earnings would take a hit of 22
cents a share. Last summer the Seattle coffee company had expected
input costs to nick earnings by up to 10 cents--that was until
prices of unroasted green arabica coffee spiked to levels last seen
in 1997.
-By Matt Andrejczak, 415-439-6400; AskNewswires@dowjones.com