Raw material pricing will continue to knock food industry in 2004

- Last updated on GMT

Related tags: Raw material prices, Raw materials, Food, Tonne

Wheat, corn and soybean prices will remain high for much of 2004,
warns the US agency Fitch Ratings, with the industry likely to see
a continual shifting of higher ingredients costs onto the food
manufacturer. But tough negotiations to 'lock-in' prices will mean
continued squeezing of margins.

These stable commodities, used as raw materials for a massive range of ingredients found in everyday food products, are substantially above their five year averages with soybeans even coming in at over 50 per cent above the average.

Supporting incremental rises in raw materials throughout 2003 has squeezed margins to a maximum for ingredients companies operating today.

A glimpse at recent annual results shows a raft of ingredients and additives companies touched by the soaring raw material prices. Number one flavours giant Givaudan said last week that sharp increases in raw materials had cut into the bottom line for 2003 with net income coming in at SF216 million (€139m) on the back of a 1.5 per cent rise in sales to SF2.72 billion.

Imperial Chemicals Industry (ICI) subsidiary National Starch reported this month that the group 'remains vulnerable to the higher price of raw materials pressing the ingredients industry today'​.

According to ICI, the lift in raw material prices added $30m (£17.8m) to costs in 2003. While only $25m of which was passed on to customers through price rises, if the rises continue as anticipated, National Starch, like others, may well have to create some breathing space through price rises shuffled onto food manufacturers.

Elsewhere, citing decreased margins and soybean prices at 19 year highs, US soy processor Bunge this week announced it would 'lie idle' production at a soybean processing facility in the US.

China has dominated all cereal and oilseed markets this year, and soybeans are no exception. In a parallel situation to wheat, rising demand from China, pulling on already low global soybean stocks suffering from a drought in the US last summer, has pushed up the prices.

The growing Chinese economy is largely responsible for the surge in demand - more money, more consumer buying power - that saw soybean imports more than double from 10.4 million tonnes in 2001-2002 to 23 million tonnes in 2003-2004.

The Chinese $5.4 billion soybean purchase from international markets last year exceeded domestic production for the first time. China, once a major exporter of soybeans, produced only 16.2 million metric tons in 2003.

With demand outstripping global wheat stocks, currently at a 30 year low, wheat prices are also in for a volatile ride in 2004. In 2003, final harvest figures for Europe and Russia came in 50 million tonnes lower than expected. And despite a 40 million tonnes lift from the US - the world's biggest exporter - as well as Canada and Australia, global yields of 552 million tonnes for 2003 fell short on demand, sending wheat prices high.

Prices, that have shot up by more than 50 per cent on last year's figures when it was trading at £60 per tonne, are currently trading at around £85 per tonne. Once again China, as the biggest consumer and producer of wheat in the world, has also contributed to price rises in the wheat market.

According to a recent Goldman Sachs​ report, in 1996 Chinese wheat imports accounted for 11 per cent of domestic demand, and 2 per cent of global demand. But with record harvests leading to high stocks in the late 1990s China no longer needed imports to meet domestic demand.

In the past two years, China's domestic demand has once again outstripped production, with the Chinese renewing imports. In 2003 the country bought in 3 million tonnes of wheat. Crucially, the Chinese purchase - pulling on diminishing global stocks - sent wheat prices even higher.

Even with a surge in stocks across the board, as yet uncertain and not looking likely for soy, food manufacturers and ingredients companies can expect a challenging 2004, with or without heavy contract deals.

Tough negotiations on contract prices have gone some way to 'locking in' prices for pre-packaged food companies, but have kept up the pressure on margins at the ingredients end.

Reporting on contracting talks last month, US starch supplier Corn Products International said that despite projecting good growth for the year, 'the negotiations did not deliver the pricing improvement commensurate with the company's cost of capital.'

A recent report on food production from the US think-tank the Earth Policy Institute​ predicts that 'if we have a shortfall in 2004 that is even half the size of this year's, food prices will be rising worldwide by this time next year. You won't have to read about it in the commodity pages. It will be evident at the supermarket checkout counter,' said the group.

For the institute the new combination of falling water tables and rising temperatures, along with trends such as soil erosion, has led to four consecutive shortfalls in the world grain harvest. This year production fell short of consumption by a record 92 million tons. In autumn 2003, wheat and rice prices rose 10 per cent to 30 per cent in world markets, and even more in some parts of China. These rises may only be the warning tremors before the earthquake, concludes the policy group.

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