Food industry weathers financial crisis

by Josh Sosland
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KANSAS CITY — While the financial crisis and mortgage debt bailout have placed the stock market spotlight principally on the financial sector, shares of companies in various parts of the food industry have moved in widely varying ways both in recent weeks and in the period since May when stock market weakness first became pronounced.

Additionally, while the health of the financial sector has appeared in greatest peril in the period leading to the federal bailout plan for holders of distressed mortgage-backed securities, market analysts warned that food companies and other sectors may not escape unscathed from the economic and financial market developments buffeting the United States.

Hardest hit since May and in the last fewweeks has been the Food Ingredients Index, one of several indexes compiled by Food Business News. The ingredient index is down 33% since May 29 and down 12% since Aug. 28. The sector’s swoon completely erased the group’s stunning outperformance of the previous 2½ years that left the index at a peak of 18,480 in May, up from 10,000 points in March 2005. Declines for a number of companies in the index, including Archer Daniels Midland Co., Bunge Ltd. and MGP Ingredients Inc. have approached 50%.

The best performances since the spring have been scored by the Diversified Food Index and the Confectionery Index, up 1.6% and 3.9%, respectively, since Aug. 28. Going back to May 29, the indexes were down 0.1% and up 2.4%, respectively. By contrast, the S.&P. 500 was down 7% since Aug. 28 and 14% since May 29.

While food companies historically have been a "safe haven" during turbulent times for the stock market, one securities analyst said there was more to the recent gains posted by the diversified food companies and confectionery companies than reflexive investor buying.

"Branded companies are coming out quite well in the current environment," he said. "You have commodity costs starting to decline, and people are beginning to eat at home more. I’m feeling more confident about how these companies look relatively speaking compared to the rest of the market."

The analyst said the companies also have benefited from steps they’ve taken to reduce debt in recent years. In several instances, the debt had ballooned earlier in the decade or late in the 1990s because of large acquisitions.

Asked about the effects of the financial industry crisis on the ability of the food companies to operate, the analyst said it was too early to see whether access to capital will be impaired.

"So far, it has not affected their ability to get access to capital," he said. "Commercial paper markets were locked up for a little while, which was a concern. From a balance sheet perspective, looking at the industry more generally, some companies are in better shape than others. A few of the companies are highly leveraged. But the food industry is more conservative than the market overall."

While branded companies may be better positioned than the food industry overall, the analyst said even these larger companies are not without their market challenges. Private label has been gaining market share, he explained.

"My feeling is that the companies that have brands that are highly differentiated or are in categories that are not commoditized are doing better," he said.

The turn to private label has not upended the consumers’ steady move toward health and wellness, the analyst said. Still, new trends reflecting the changing economic realities are emerging.

"Food companies are changing the brands and products getting marketing attention," he said. "For instance, powdered beverages and condensed soups will get more attention because they are cheaper."

The adverse effects that could result from the credit crisis may affect food companies and many businesses in a wide variety of ways, said Leonard Teitelbaum, a financial analyst based in Holmdel, N.J.

"I’m concerned about the effects that this may have had on pension plans, which may have shifted from overfunded to underfunded," Mr. Teitelbaum said. "I’ve noticed that certain brokerage firms have had to or may have to eliminate commodity trading operations, which would reduce the liquidity in the marketplace for those companies that hedge their commodities.

"This could have spillover effects. We are approaching the time of year when many companies hedge their commodities for the coming year, and we’ll see. You can’t have liquidity if there is only one side in there. As you reduce capacity, the market becomes less and less liquid. I know one significant player is going to leave the marketplace. Whether that role will be filled is yet to be determined."

Because food companies tend to have liquid balance sheets, Mr. Teitelbaum warned that they may be more vulnerable to money market woes.

"Food companies may invest their money in counterparty transactions where collateral has been posted may not be as sacrosanct as previously thought," he said.

Turning to the food business itself, Mr. Teitelbaum said the industry’s vital signs appear strong, as measured by key marketplace signs. At the same time, pressures on the consumer hang menacingly over the marketplace.

"They are continuing to market aggressively and maintain a high level of new product activity in the marketplace," he said. "I would also say there is a frontal attack that is obvious on the consumers’ disposable income. The consumers’ dollar has to be stretched, which should lead to more promotions and margin impact. So far, the food companies have done a remarkable job of protecting margins. I am concerned about margins as we get into the spring of this coming year."

Mr. Teitelbaum said the margin pressure is less likely either in the current back-to-school period or the holiday season.

"For Thanksgiving through the Super Bowl, we continue to see more home eating as people restrict vacation time," he said. "I’m looking for a good season, regardless of the pressures. Home heating oil is the major concern, but we think they will still squeeze out money for robust numbers."

Beyond the late winter, Mr. Teitelbaum said the outlook seems far cloudier.

This article can also be found in the digital edition of Food Business News, September 30, 2008, starting on Page 1. Click
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