Commodity companies will struggle to pass on costs, says Fitch

By staff reporter

- Last updated on GMT

Related tags: Food companies, Banana

Branded packaged food companies have greater pricing power than
commodity protein and fresh produce companies, according to Fitch
ratings agency.

This year, higher costs of feed grain have been absorbed by the likes of Tyson and Smithfield in the protein segment, and fresh product companies like Dole and Chiquita have stumped up for higher European banana tariffs, as well as stiff packaging and shipping costs. The agency does not see much change in the situation for grains, but some relief may be seen for the fresh commodity companies through a potential reduction in banana tariffs; even so, the overall impact of this will be negligible as packaging and fuels costs stay high. Branded packaged food companies, on the other hand, will be able to pass on these costs to retailers more easily since they have greater product differentiation and can therefore spread the expense across more products. "Fitch does not expect participants in the protein and fresh produce sectors of the food industry to have the ability to offset 100 percent of costs,"​ it said. At the consumer end, food prices have inflated by 3.4 to 4.5 per cent. One way that commodity food companies have sought to improve their margins has been by adopting a value-added strategy - but their success has proved limited by lack of funding of research and development and advertising, as well as the value that consumers themselves place (and are therefore prepared to pay) for these products. These challenges will have an impact on Fitch's ratings, and lack of debt reduction could impact credit. Even so, none of the companies Fitch rates look to be heading for liquidity. Indeed, where those in the still-fragmented protein sector do have some cash to hand, they may well use it to make small acquisitions.

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