Module Title: Business Envrionment
Read carefully this (adapted) extract from The Economist (2011).
The consequences of costly nosh
What record food prices mean for business
HIGH prices are good for farmers. Low prices are good for consumers. “And we are in the middle,” says Alberto Weisser, the boss of Bunge, a trader of agricultural commodities. After poor harvests in Russia, Canada and Ukraine last year, a recent heatwave in Argentina and floods in Australia that wiped out much of the country’s wheat crop, everyone is grappling with pricey food.
According to the UN’s Food and Agriculture Organisation (FAO), food prices last month surpassed their previous high in 2008. “The situation is not rosy, but there is no reason for panic-buying,” says Abdolreza Abbassian at the FAO.
Russian, Canadian and Ukrainian farmers had a tough year in 2010, but other farmers are chortling. High prices put cash in their pockets and give them an incentive to plant more crops. As barley production in Russia slumped, the production of sorghum in Sierra Leone and Ghana surged. International brewers such as Heineken have started to experiment with sorghum beer, a cheaper brew that is strangely popular in Africa and China.
High food prices fatten traders, too. America’s Cargill, the world’s biggest trader of raw foodstuffs, tripled its profits in the second quarter of its fiscal year. On January 19th the privately owned firm announced that it will sell its stake in Mosaic, a fertiliser business, in a deal worth $24 billion. This will allow Cargill to stay private, after family shareholders eager to cash out had put pressure on it to float.
For makers of processed nosh, costly raw materials are a problem. ConAgra, General Mills, Kellogg’s and Kraft recently raised prices for many of their wares. In December ConAgra, which makes Slim Jim meat snacks, among other delicacies, reported a 16% decline in second-quarter profits. Like other food makers, ConAgra is experimenting with smaller packages sold at the same price.
Switzerland’s Nestlé, the world’s biggest food firm, is not yet worried. “We welcome higher prices, because they are an added incentive for farmers to produce what we need,” says Robin Tickle, a Nestlé spokesman. The cost of milk, cocoa, coffee and sugar, Nestlé’s main ingredients, account for only 12% of sales. The company protects itself against short-term volatility by using forward contracts and by buying directly from farmers with whom the firm has a long-term relationship.
For retailers food inflation is “moderately good”, says Christopher Hogbin at Bernstein Research. Their share price tends to rise as investors expect higher margins. Commodity-price rises are usually passed on to consumers only after a six-month lag, thanks to forward-buying by food-makers. Food prices will rise by 6.6% this year in Britain, Bernstein forecasts, having risen by 3.1% last year.