Operating costs to pressure commodity food sector

by FoodBusinessNews.net Staff
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NEW YORK — Fitch Ratings reports that in 2008 higher operating costs will continue to pressure the profitability of commodity food companies as well as companies with commodity-oriented product lines, according to the report "Commodity Foods: High Operating Costs Threaten Profits in 2008."

"Increased pricing will not offset all of the higher costs for industry participants," said Carla Norfleet Taylor, director of Fitch Ratings. "Despite higher-than-average food cost inflation, commodity-oriented businesses have less pricing power than packaged food companies due to the lack of significant differentiation in their products."

Fitch believes strong foreign grain exports and demand for corn will continue to encourage higher feed grain prices, which leads to difficulties for Tyson Foods, Inc. and Pilgrim’s Pride Corp. as corn and soybean meal represent up to 40% of variable costs for these companies.

Raw milk prices also will be affected as high feed costs for cattle and strong dairy export demand will place pressure on costs for companies such as Dean Foods Co.

Fresh produce companies also will face difficulties as high fuel prices and shipping costs will impact Dole Foods Co. and Chiquita Brands International as they source a large amount of their products from Latin and Central America.

While Del Monte Foods Co. has a more diversified higher-margin product mix with pet food and snacks, the profitability of the StarKist tuna business is expected to be a challenge until raw tuna supply and demand conditions improve, Fitch said.

"Pricing actions and a mix shift toward higher-margin products are crucial this year, since the industry is subject to cost pressure that is difficult to completely offset solely with productivity initiatives," Fitch said. "If pricing actions cannot be achieved to the extent desired by packaged food companies, they are likely to see margin deterioration in 2008. Margin erosion by itself is not expected to affect credit ratings unless companies’ credit measures are already weak for the rating category. However, margin erosion, combined with more aggressive financial policies such as debt-financed share repurchases or acquisitions, could lead to rating downgrades."

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