Input inflation on the rise

by Eric Schroeder
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Escalating oil and gas prices, coupled with rising labor costs, are a few of the input costs expected to weigh on food and beverage manufacturers during 2008.

Expectations that tight market conditions will continue into 2008 are keeping global oil prices high, according to the Energy Information Administration (E.I.A.) of the U.S. Department of Energy. In its latest "Short-term energy outlook" report published Dec. 11, the E.I.A. said the oil balance outlook for the upcoming year is characterized by rising consumption, modest growth in non-OPEC (Organization of Petroleum Exporting Countries) supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations.

"Although the balance assumes a mild slowdown in world economic growth, the major downside risk remains the possibility of a sharper-than-expected economic slowdown brought on by the fallout from the unsettled financial markets, which would dampen oil demand and ease oil price pressures," the E.I.A. said.

According to the E.I.A., China, non-OECD (Organization for Economic Co-Operation and Development) Asia and the Middle East countries are expected to remain the main drivers of higher world oil consumption through 2008. Total global oil consumption in 2008 is projected to rise by 1.4 million barrels per day (bbl/d) over 2007 levels.

Looking at the United States, the E.I.A. said total domestic petroleum consumption is forecast to average 20.8 million bbl/d in 2007, up 0.4% from the 2006 average. That average is expected to increase by 1.1% to 21 million bbl/d in 2008, the E.I.A. said. Motor gasoline consumption, meanwhile, is projected to increase by 0.6% in 2007 and by 1% in 2008.

From a production standpoint, domestic crude oil output in 2007 is projected at an average of 5.1 million bbl/d, which would be 0.2% higher than 2006 production levels. Looking ahead to 2008, domestic production is projected to rise by 2.3%, to 5.2 million bbl/d. The E.I.A. said the higher forecasts reflect two recently opened Atlantis deepwater platforms, which are expected to come on stream late in 2008.

Food and beverage companies should expect higher crude oil prices heading into 2008, according to the E.I.A. The refiner acquisition cost of crude oil is projected to increase to $67.89 per barrel in 2007, up from an average of $60.23 per barrel in 2006. In 2008, the average is expected to grow to almost $80 per barrel, the E.I.A. noted.

"Slower U.S. economic growth of 2.1% is projected for 2007 and 1.8% for 2008, compared with 2.9% in 2006, which may be a mitigating factor for even higher crude oil prices," the E.I.A. said.

Despite recently declining gasoline prices over the past month, delivering products across the United States is expected to become even more costly in 2008. Prices that peaked at $3.11 per gallon in mid-November are expected to rebound to over $3.40 per gallon as the driving season begins next spring. In 2008, heating oil prices are projected to average $3.11 per gallon while diesel fuel prices are expected to average $3.21 per gallon, the E.I.A. said.

Increases in the residential, commercial and electric power sectors that occurred early in 2007 contributed to a rise of 5% in total natural gas consumption in 2007, the E.I.A. noted. The rate of increase is expected to decline to 1.1% in 2008, as the E.I.A. said it expects a return to near-normal weather.

Total electricity consumption in 2007 is projected by the E.I.A. to increase by 1.9% over 2006, and will continue to climb in 2008.

"Cooling degree-days in 2008 are assumed to be about 12% lower than in 2007," the E.I.A. said. "The assumed return to near-normal temperatures should keep residential electricity sales growth relatively flat at a rate of 0.2% next year. Slow macroeconomic growth in 2008 will also limit growth in electricity sales to the commercial and industrial sectors."

Producer prices soar

Another indicator of rising input inflation is reflected in the Producer Price Index for Finished Goods, which climbed 3.2% in November, the sharpest gain in 34 years, according to a report issued Dec. 13 by the Bureau of Labor Statistics of the U.S. Department of Labor. The gain, buoyed by a record rise in gasoline prices, comes on the heels of a 0.1% increase in October and a 1.1% gain in September. The Producer Price Index measures average changes in prices received by domestic producers for their output.

The sharp gain in the finished goods index was led by prices for energy goods, which soared 14.1% in November, surpassing the previous high of 13.4% in January 1990. Taking a closer look at energy goods, the gasoline index jumped 34.8% in November after falling 3.1% in October. Prices for home heating oil, diesel fuel and asphalt all turned up in November, the B.L.S. said.

The intermediate energy goods index rose 13.3% in November after falling 0.1% in October. Diesel fuel prices surged 35.8% in the month, the B.L.S. said, while the indexes for gasoline, home heating oil, residual fuel and commercial electric power also all finished higher. By contrast, the index for commercial natural gas fell 6%, while prices for industrial gas and for natural gas to electric facilities also declined.

The index for crude energy materials rose 17% in November after increasing 5.9% in October, according to the B.L.S. The advance in the index for natural gas jumped to 21.6% in November from 9.7% in the previous month. Prices for crude petroleum climbed 15.5% following a 3.7% increase in October.

The Consumer Price Index for All Urban Consumers increased 0.8% in November, its largest advance since a 1.2% gain in September 2005, according to the B.L.S. The increase primarily was driven by a soaring energy index, which advanced 5.7%, accounting for nearly 70% of the overall C.P.I. increase in November. Within energy, the index for petroleum-based energy rose 9.5% and the index for energy services climbed 0.7%, the B.L.S. noted. The C.P.I. is a measure used to track the change in prices for common household goods over time. The C.P.I. is developed using a "market basket" approach.

Manufacturer survey shows economic growth to continue in new year

NEW YORK — With economic growth in the United States expected to continue in 2008, the manufacturing sector — which includes the food and beverage category — should achieve higher sales despite challenging input costs, according to the "December 2007 Semiannual Economic Forecast" of the Institute of Supply Management (I.S.M.). The I.S.M. is the largest supply management association in the world.

"Manufacturing purchasing and supply executives are mostly optimistic about their organizations’ prospects for the first half of 2008, and predict additional growth during the second half," said Norbert J. Ore, chairman of the I.S.M. Manufacturing Business Survey Committee. "While 2007 has been a good year overall, it has presented significant challenges with regard to energy costs and overall inflation in manufacturing input costs. Respondents expect cost pressures to subside somewhat in the second half of 2008 based on their overall price forecast."

According to the survey, respondents in the manufacturing sector operated at 82.9% of their normal capacity, up from 82.8% in April 2007. The food, beverage and tobacco category was one of nine industries at or above 82.9%. Purchasing and supply executives in the manufacturing segment predicted capital expenditures will increase by only 0.7% in 2008, down from an 18.2% increase in 2007.

Looking at labor costs, respondents in the manufacturing survey said they expect employment in the sector to grow by 1.6% in 2008, while labor and benefit costs are expected to increase by an average of 2.5%.

The panel also predicted the prices they will pay will increase 3.3% during the first four months of 2008, and will increase 1% during the balance of 2008, with an overall increase of 4.3% in 2008. Major concerns cited by respondents were energy cost and supply, weak dollar, inflation, housing, and commodity prices.

"Survey respondents are optimistic about the next 12 months, but not as bullish when compared to their responses in December 2006," the I.S.M. said. "The 37% who report a better outlook is less than the 53% response received in December 2006. The 38% who report that the outlook is the same is up from the 30% reported in December 2006, and the 25% who indicated the outlook to be worse is higher than the 17% reported in December 2006."

This article can also be found in the digital edition of Food Business News, December 25, 2007, starting on Page 26. Click here to search that archive.

 

 

 

 

 

 

 

 

 

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