Pressure Cooker: Rising Commodity Input Costs Impacting Food & Beverage Organizations
Droughts in Russia. Floods in Brazil. Growing consumption in emerging markets.
What do these three have in common?
They’ve all contributed to a massive rise in input costs for food & beverage companies. Case in point: agricultural commodity prices rose by nearly 50% between January 2010 and January 2011.
A February 22nd Business Wire release reported that “According to Fitch (Ratings), the recent sharp and sustained increase in a basket of commodity prices represents a growing source of concern for fixed income investors…input inflation across a broad range of agricultural, energy, and industrial commodities has spiked sharply and is expected to put increasing pressure on margins and end-user prices in a number of commodity-dependent sectors in 2011.”
Commodity-sensitive sectors, such as protein processors, ethanol producers and airlines are expected to be hardest-hit; beverage producers and automotive suppliers to a lesser extent.
The current commodity spike will differ from 2008, in that food & beverage organizations may be in a better position this time around to pass along higher input costs via pricing – primarily because of more consistent demand across a range of consumer products.
When asked about price increases that are beginning to appear in the marketplace, Gary Rodkin, the president and chief executive officer of ConAgra Foods, Inc., Omaha, stated, “We are confident that these moves are the right thing to do given the inflation of our input costs. While not easy, pricing is not a choice; it is an imperative. We cannot ignore the impact of dramatically increasing input costs on margins.”
Beverage manufacturers are feeling the same pressure. PepsiCo has said that it expects a “highly competitive environment” in 2011, with commodity costs remaining a “major headwind” for the snacks and beverage giant.
The bottom line? Significantly higher commodity costs are here for the medium-to-long-term and will place increasing margin pressure on food & beverage companies. Industry leaders are trying a range of approaches, from cutting operating costs to raising prices, to deal with the added pressure, but it remains to be seen how successful their strategies will be.
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