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Falling Input Costs Could Bolster Packaged Food Innovation in 2012

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After rising steadily from mid-2010 to mid-2011, the price of food inputs on global agricultural commodities markets remained elevated for the duration of 2011. In turn, this further squeezed margins for packaged food manufacturers already facing considerable pressures from a consolidating grocery retailing landscape worldwide and mounting private label encroachment.

Thankfully for food manufacturers, the tide may finally be turning. With global economic prospects facing rising headwinds, in the short to medium term at least, the likelihood of food input price deflation on international agricultural commodities markets may increase. Persistent sovereign debt concerns in the Euro-Zone and US have resulted in a strong contraction in public spending, a key component of aggregate national demand. As the economic situation has gradually worsened on the back of mounting austerity, so have global economic growth projections and, alongside, demand and prices for manufacturing inputs.

In March 2012, the IMF food price index increased for the third consecutive month owing to higher prices for cereals, some vegetable meals and palm and soy oils. Despite the month-on-month increase, the IMF’s March index also saw a near 6% decline on an annualised basis. The price of corn, wheat, sugar and cocoa in March 2012 were all well below prices seen in September 2011.

Should food input costs continue falling on an annualised basis, considerable savings could be had all along the supply chain that can benefit packaged food manufacturers/processors, retailers and consumers. For example, lower costs for corn and wheat can allow dairy farmers to invest more in machinery and equipment, or simply to buy more cows. Regardless, the net outcome is typically an increase in productivity. In turn, stronger supply typically results in lower farmgate/factory – if not retail – prices.

Relatively stable commodities prices can also lead to cost savings, as reduced volatility allows for better and more effective cost planning. Price stability helps manufacturers to know in advance the price of raw materials to be used in the actual manufacture of their products. As a result, costs associated with hedging against risk and the re-adjustment of volume deliveries can be reduced rather significantly. In turn, these cost savings can be reallocated to R&D budgets and new product development.

That said, potential commodity price deflation will impact developing and developed markets differently, given the different operating and retailing environments involved. In India, for example, flat to declining grain prices should greatly benefit the ability of larger milk processors to reach more consumers across the country. In Spain, by contrast, falling grain prices will allow for greater scope to innovate, benefiting more premium-oriented bread producers.

Despite the likelihood of flat to declining food input costs in 2012, the general trends remains upward, thanks to factors including population growth, falling crop yields, further diversion of crops to biofuel production and climate change. Agricultural commodity prices may also continue their steady march upwards in 2012 should any unforeseen circumstances – such as severe weather, natural disasters, and/or political upheaval – severely disrupt supply chains.

During 2011, political unrest in the Ivory Coast, floods in Thailand and Japan’s tragic tsunami and earthquake all had a significant – and in many cases sudden - impact on global commodity prices. There remains no guarantee that similar events will not blight commodities markets in 2012.



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