FOOD: World Food Industry Under Price Volatility Pressure
Recent Gauteng Business News
Food Industry - Market Volatility and Rising Prices; Major Risks for Companies
Having become an asset class in its own right, agricultural commodity prices have soared. With the exception of rice, between August 2010 and August 2011 all products recorded gains, ranging from +15% for meat and dairy products to +26% for cereals and +50% for sugar. Due to production prospects above expectations the downward trend shown since last August shouldnt expand.
In addition to heavy speculation, several factors have contributed to this global rise. Demand is increasing, underpinned by the expansion of the middle classes in emerging economies accompanied by their changing food habits. Other factors which have destabilised production and spurred price volatility include adverse weather conditions, devastating diseases, sales of land to emerging powers by governments to the detriment of local crops, and lack of transparency regarding stocks.
The Most Weakened Category in the Food Industry
In this context, companies margins and treasuries will be more or less under pressure depending on their capacity to pass on higher pricing to their wholesale and retail clients. Small and medium sized companies turn out to be less at managing cost volatility than the major international groups, which can benefit from hedging contracts and are highly flexible in terms of productivity improvement.
Furthermore, the presence of major companies in buoyant markets enables them to secure commodity supplies at the best prices. This type of company is confronted with the strain of price negotiations with large-scale retailers. However, in view of the comfortable margins reached by food companies, any impact is likely to remain marginal. Reduced consumer spending in advanced economies is offset by the momentum experienced in emerging markets. In contrast with major groups, the mainly local presence of small and medium sized food companies means that they are confronted either with lacklustre development in many advanced economies, or with recession in peripheral euro zone countries. In emerging economies where smaller companies operate alongside major international groups, they will benefit from dynamic consumer spending, but will have to face a risk of overheating which may weaken them.
Outlook: upsurge in bankruptcies among fragile companies
Coface considers that in HY2 2011 and in 2012, agricultural commodity prices will remain high despite the rates decrease since August 2011 and the expected global economy slowdown. The trend will be buoyed by abundant global liquidity, bolstered by expansionist US monetary policy.
As smaller structures are likely to be faced with difficulties in financing investments, consolidation of the food sector is set to continue while access to bank credit remaining problematic. This situation will certainly lead to an increase in bankruptcies among the most fragile companies. Since January 2011, the Coface payment incident index for the food industry has progressed in line with the hike in commodity prices.
Food Industry - Focus on Regional Trends
In Europe, the food sector is fragmented; with mixed results in 2011 in Western Europe as consumer spending is expected to slow down, particularly in the UK, Greece, Portugal and Ireland. This result should cause the number of bankruptcies to increase. The trend in Eastern Europe is more optimistic, with expected GDP growth of close to 3.8%. Households are continuing to clear their debts however, which will weigh on spending.
In France, the food industry remains the leading economic sector and the second-largest industrial employer. Nevertheless, having resisted well during the crisis, there has been an increase in the number of bankruptcies since 2010, on account of higher commodity prices, and as the sector is running out of steam in the international market.
In the US, 7 American food industry companies feature among the 10 largest global groups, although their size does not always hold sway in price negotiations with aggressive discount retailers.
Japan, which is 60% dependant on imports for consumer goods other than rice, is finding it increasingly difficult to export due to the strength of the yen. This phenomenon has been exacerbated since the Fukushima tragedy in March 2011. Japanese industries are therefore fragile with household spending expected to fall slightly in 2011 and stage a minor rally in 2012.
In China, the food sector is facing two major risks: food safety problems, which leads to a poor image among Chinese consumers; and particularly steep inflation due to high commodity costs and rising wages. On-going consolidation is reinforcing major structures, with the arrival of foreign investors ensuring product quality.
Brazil has become a major exporter of agricultural commodities, and its large food companies are expanding internationally. Despite the depreciation pressure on the Real since August 2011, Brazilian currency maintains at a high level. This hinders exports of the local food industry which suffer also from insufficient infrastructures.
Business News Sector Tags: Food|