Soaring commodity prices just beginning to impact retail

by Ron Sterk
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KANSAS CITY — Soaring ingredient prices that have affected food manufacturers for several months are beginning to reach the consumer level, although some commodity prices are showing indications of a moderating trend at midyear.

The All Farm Products Index of prices paid to farmers in June was 141% of its 1990-92 base of 100, up 2% from May, up 14% from January and up 19% from a year ago, the U.S. Department of Agriculture said in its latest Agricultural Prices report.

Many indexes for prices paid to farmers were well above year-ago levels in June. The U.S.D.A. index for poultry and eggs was up 30%, food grains was up 31%, oil-bearing crops was up 35% and dairy products was up 68%.

Gains in milk and dry dairy products have been some of the most spectacular among the raw commodities and ingredients. At mid-July, nonfat dried milk (N.D.M.) was quoted at $2.03@2.65 a lb for high-heat and $1.98@2.53 for low- and medium-heat. Those values were up 60% to 90% from the first of the year and up 140% to 190% from a year ago. N.D.M. has been the catalyst that other dried dairy product prices have followed upward as manufacturers sought substitutes.

Despite high feed prices, the nation’s dairy herd is increasing in response to strong milk prices. Monthly milk production has been above year earlier levels every month since February 2005. While seasonal trends have been near normal (milk production decreases during the hot summer months), last summer’s extreme heat in California, the nation’s largest milk producing state, drove prices sharply higher. Followed by lower milk production in other parts of the world, prices never dropped to expected levels.

Soaring prices for dairy products is the result of globally strong demand and tight supplies, the U.S.D.A. said. Export demand has competed with domestic needs and driven prices for many dairy products to record levels.

The impact of higher milk and dairy product costs was reflected in Sosland Publishing Co.’s food ingredient indexes for vanilla ice cream, up 74% from a year ago in mid-July; milk chocolate bar, up 29%; and cheese pizza, up 15%.

Dairy users react to high prices

Rising ingredient prices have had an impact on food manufacturers, especially those that use dairy products heavily. Some have passed price increases on, while others temporarily have absorbed higher ingredient prices. A few have lowered profit projections because of ingredient price increases.

Dallas-based Dean Foods Co., the nation’s largest processor and distributor of milk and dairy products, lowered its second-quarter and annual earnings expectations in June, in large part because of high milk prices.

Chocolate manufacturers also have been affected by the rise in milk prices.

The Hershey Co., Hershey, Pa., revised its earnings outlook for 2007 "as a result of increasing dairy input costs."

"Within the past few weeks, the impact of higher dairy costs has significantly increased our cost profile for the remainder of the year," Richard Lenny, chairman, president and chief executive officer of Hershey, said in May.

Comments from Peter Brabeck-Letmathe, chairman and chief executive officer of Switzerland-based Nestle S.A., the world’s largest food company, have been even more dramatic. Mr. Brabeck-Letmathe told the Financial Times population growth, increasing demand from Brazil, China, India and Russia, and the use of food products to produce alternative energy will cause significant and long-lasting inflation for food prices. Nestle plans to increase prices, cut unprofitable products and close some of its food plants to deal with rising prices.

Two of the nation’s largest pizza chains, Papa John’s and Pizza Hut, recently raised the price of "cheese only" pizzas to the same level as single-topping pizzas because of higher cheese prices. Papa John’s indicated cheese accounts for 35% to 40% of its ingredient costs.

The shortage and high prices of dairy products spilled over into other ingredients, such as soy flour, which may be used as a substitute in some applications. Despite multi-year high prices for soy flour, processors barely have been able to keep up with demand for the past several months. The price of bulk soy flour peaked at $17.28@17.71 per cwt on July 13, following soaring soybean meal prices. Those values were up about 20% since Jan. 1 and up 33% from a year ago. Prices declined last week following a sharp break in soybean meal prices, but still were well above year-ago levels.

One ingredient that has been directly affected by high raw commodity prices is wheat flour, most notably semolina, made from durum and the key ingredient used to make pasta. Weather-reduced durum crops in the U.S. and Canada in 2006 have left durum stocks extremely low. Durum prices surged to a record high $9.50 a bu in early July and the price of semolina followed, hitting a record high of $24.45 per cwt, both up more than 50% since Jan. 1 and about 80% from a year ago. Durum prices retreated slightly last week, and prices likely will decline further as much larger durum crops in the U.S. and Canada are harvested later in August.

Not all products see price gains

The increase in raw commodity and ingredient prices, while broad, has not been all encompassing. Exceptions in the U.S.D.A. prices paid data included the potatoes and dry beans index, up only 1% from a year ago, commercial vegetables up 4%, meat animals up 4% and fruits and nuts down 11%.

While chocolate manufacturers have struggled with near-record high milk prices, prices for their other two main ingredients — cocoa and sugar — have changed little or declined from a year ago.

The price of 10% to 12% butterfat natural cocoa powder was 52@57c a lb at midyear, up only 2@3c from January and a year ago. Although cocoa bean grind has increased about 3% annually, world carryover stocks and production have been sufficient to meet demand. Supplies of higher quality grades, however, have been somewhat tighter, in part because of the emphasis on dark chocolate.

Sugar prices have decreased from a year ago, when they still were declining from near-20-year highs brought about by Hurricane Katrina in late 2005. Bulk industrial sugar prices have held near 25c a lb, f.o.b. Midwest, since February, down from Jan. 1 and down 10c from a year ago. Sugar has been trading at the same level for next year. Although prices firmed some recently, supplies are expected to be ample in coming months.

Many food manufacturers have been slow to pass on significant ingredient price increases to consumers, although higher prices at the retail level certainly are evident.

The U.S. Department of Labor’s Consumer Price Index (C.P.I.) for food has reflected a slower rate of increase at the retail level. The June C.P.I. for food and beverages was up 0.5% from May and up 4.1% from a year ago. In May the food index was up 0.4% from April and up 3.9% from a year earlier. The overall C.P.I. was up 2.7% from a year ago in May and June.

Have prices turned the corner?

Wholesale prices as reflected in the Labor Department’s Producer Price Index (P.P.I.) for finished consumer foods in June were up 6.5% (not seasonally adjusted) from June 2006, but were down 0.7% from May. Prices of fresh eggs declined 17.8% from May and fresh fruits and melons dropped 14.9%. But dairy product prices, up 25.1% from a year ago, still rose 6.3% from May.

Several dairy product prices showed signs of slight weakening in the past two weeks, in part to buyers’ resistance to high prices after consistent weekly gains for nearly a year.

Much of the blame for rising commodity prices has been heaped on the ethanol industry, which is expected to use 58% more corn (26% of the projected record large 12,840 million bus crop) in 2007-08 as ethanol production capacity increases significantly in the next few months. Contra-seasonal increases in corn prices last fall certainly were fueled by prospective ethanol needs, but additional gains resulted from speculative futures trading. U.S. farmers responded to higher prices with the largest corn acreage since 1944, planting an estimated 92.9 million acres this year, which is considered sufficient to meet demand for ethanol, food, feed and exports in 2007-08.

The price of corn in the September 2007 futures contract traded at the Chicago Board of Trade closed at $3.22½ a bu on July 17, down about 25% from its recent high of $4.26 on June 15 and up only 6% from a year ago. Soybean and soybean meal prices also plunged last week. Seasonal trends and favorable weather have been the key factors.

Most analysts and traders agree commodity pricing in the short term depends on this summer’s weather. Crop condition ratings, as reported by the U.S.D.A., started the season as some of the highest ever, but have dropped back to more moderate, but still good, levels the past couple of weeks. And recent forecasts have looked good for summer crop development, at least in the United States.

This article can also be found in the digital edition of Food Business News, July 24, 2007, starting on Page 1. Click here to search that archive.

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