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Global food commodity inflation will likely ease in 2012, Moody's Investor Service said Monday, but the rating company warned that food companies might attempt to recapture stronger profits through price increases, after exhausting margin-saving measures.
The ability to pass raw material price increases on to customers has cushioned the food sector over the last year, Moody's said, but slowing demand due to Europe's uncertain macroeconomic situation will make it harder for them to do so in future, and margins could contract if input costs rise again.
The rating company said the price of globally traded commodities rose rapidly in the first half of 2011 and drove input costs higher for many industries, causing margins to contract in the food sector.
Prices for some commodities remain at historically high levels, Moody's said, despite easing on uncertainty over future demand as the pace of economic growth in 2011 and the outlook for 2012 deteriorated.
It said large European and multinational food producers such as Nestle SA (NESN.VX), Unilever PLC (UL) and Danone SA (BN.FR) have been able to mostly offset the effect of dearer inputs by reducing other costs and passing on price increases, albeit with a three- to six-month lag.
Such companies have very strong and diversified portfolios of brands, Moody's said, which often benefit from segment-leading positions and provide more leverage in negotiations with retailers.
Similarly, the rating company said large food retailers such as Tesco PLC (TSCO.LN) and Carrefour SA (CA.FR) have been able to adjust to food inflation by enhancing their offering mix, cutting costs, starting new promotions and leveraging pricing power over medium and small food producers.
However, these medium and small food producers have cited rising commodity prices and input costs as a constraint on operating profits, because of their limited bargaining power and higher customer concentration.
Companies such as Campofrio Food Group SA (CFG.MC) have had to aggressively cut costs, negotiate hard for price increases, push for increased volumes on lower-margin offerings and develop innovative products or new distribution channels, Moody's said.
Dealing with increasing input costs for these companies is a delicate and sometimes perilous exercise, Moody's said, citing Premier Foods PLC's (PFD.LN) significant volume declines after passing on nearly all input cost inflation.
-By Michael Haddon, Dow Jones Newswires; 4420-7842-9289; email@example.com