Alia McMullen, Financial Post Published: Monday, July 28, 2008
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Rising grain and dairy prices are taking a growing slice out of household incomes as food giants such as Kraft Foods Inc. hike their prices to cover higher input costs. That slice is expected to continue to grow, according to Donald Coxe, global portfolio strategist at BMO Capital Markets.
"I just don't believe that we're going to, three years from now, have the share of people's spending budgets on foods consumed at home anywhere near as low as it is now," Mr. Coxe, who's based in Chicago, said Monday. "There is nowhere to go but up for food prices, and any pull backs are buying opportunities."
Mr. Coxe said it was not surprising food costs would once again account for an increasing share of household spending after having eased from historical levels. Canadian households spent just over 10% of their total expenditure on food in 2006 -- the lowest proportion ever, Statistics Canada figures released in February showed. In the 1960s, food represented the largest proportion of household expenditure, at almost 19%.
Mr. Coxe said growing demand for food, particularly from China and India, changing weather patterns, trade barriers, biofuel programs and distribution inefficiencies would continue to drive food prices higher over the long term. And it appears one of the giants of the food industry agrees.
"Everybody is dealing with the same input costs and I think they are all coming to understand that this isn't going away any time soon," Irene Rosenfeld, chief executive at Kraft Foods Inc. said Monday.
Kraft, which operates in 145 countries, raised it's full-year guidance by 2¢ to US$1.92 a share after reporting a better than expected second quarter profit of US$732-million, up 3.5% from a year earlier. The food giant said it had offset higher raw food prices by passing the increases on to consumers. These product price increases contributed 7.2 percentage points to its year over year revenue growth of 21.4%.
The trickle-through effect of higher food prices has helped to accelerate the rate of consumer price inflation at a time of surging gasoline prices. In June, consumer prices were 3.1% higher than a year earlier, with food prices up 2.8% and gasoline prices up 26.9% over that time, Statistics Canada figures showed on Wednesday. Homogenized milk was 6.1% higher over the year, while the cost of bread was up 18.4%, flour up 40.9% and Macaroni up 45%. Chicken prices rose 4.6% over the year ended June, but prices of most other meats were down with producers finding it hard to pass on costs.
Arkansas-based Tyson Foods, Inc. said Monday that higher input costs at its chicken division had dragged down the company's third-quarter profit to US$9-million from US$111-million a year earlier.
"Grain costs were up an additional US$140 million compared to the third quarter of 2007 and are expected to increase approximately US$550 million for fiscal 2008," Richard Bond, president and chief executive at Tyson said.
Mr. Coxe said the inability of many meat producers to pass on higher input costs would have a lagged impact on meat prices.
"We haven't been able to get proper cost through in the meats, which means that all sorts of farmers and ranchers are being driven out of business, which guarantees much higher meat prices next year," Mr. Coxe said.
He said there needed to be more investment in farm technology and research to increase production levels and reduce the upward pressure on prices.
However, not everyone believes food inflation is here to stay. Daniel Flynn, an energy, grain and ethanol trader at Alaron Trading in Chicago said grain and cereal prices would correct as oil prices fell.
"I am anticipating a correction in the market. I'm not sure if we're out of the woods just yet, but I think the market is overdue for a correction," he said.
