LONDON - Europe's top food makers are under pressure on two
fronts.
With rampant commodity costs forcing them to raise prices,
hard-pressed consumers are opting for cheaper products while critics insist that
the industry is milking the situation.
Wheat and soy are at their highest ever levels while coffee
and cocoa are more expensive than they have been for decades and there are no
signs of a let-up any time soon.
Already French Prime Minister Francois Fillon has accused the
food industry and retailers of profiting from the sharp rise in commodity
prices, while others say interest rate cuts in Europe and the United States may
help stoke this food inflation.
Demand continues to rocket as supply dries up due to poor
weather in key growing areas, alternative use for biofuel production and
burgeoning demand in fast-growing economies such as China and India.
Adding to upward pressure on prices, investment funds'
near-obsession with commodities has intensified as global stock and bond markets
continue to struggle, and they see commodities as a good bet for their capital
amid a global inflationary environment.
Analysts say strong food price inflation is likely to last
through 2008 and the increased gap between value-priced products and
premium-priced foods may tempt shoppers to go for the cheaper options as
downturn fears grip Europe and the United States.
"Higher prices tempt more supply onto the market, but will
also ration demand," said Edward Hands, senior portfolio manager at Commerzbank
Alternative Investments.
"People will start to make choices - do I have expensive
prepared food or go back to basics. This is not something people of my
generation have been used to... We're in for a seachange in mentality," he
added.
But some analysts say this food inflationary pressure can be
contained with Martin Deboo at Investec Securities saying that food products
account for only 9 percent of UK consumer's wallets compared to 12 percent in
the last UK recession in 1991.
"There is a risk to premium-priced products but I think they
are relatively immune, and the inflationary pressures can be contained," he
said.
Europe's top food groups such as Nestle, Unilever and Cadbury
Schweppes have increased their prices to offset the rise in commodity prices,
but the prices keep on rising.
For a UK company like Premier Foods which is a big user of
wheat for its Hovis breadmaking the effect has been dramatic with its share
price halving since the start of this year and the stock off 8.8 percent at
86-1/2 pence by 1200 GMT (8 a.m. EST).
France's Fillon pledged to attack market "abuses" after a
high-profile report showed the price of grain and milk-based products surged in
France in recent months, and he added price surveillance measures will be
stepped up.
"There are clearly abuses on the part of industry and
retailers who are profiting from increases in agricultural commodity prices to
increase their margins," he said.
The world's biggest food group, Nestle, was one of the first
to react early in 2007 and raise its prices for its Nescafe coffee, KitKat
chocolate bars and babyfoods to offset soaring commodities prices, and others
were quick to follow.
Cadbury saw its milk and cocoa prices rise and Unilever
suffered as vegetable oil and tea prices increased, while all have faced higher
mineral oil prices which have raised production, packaging and transport costs.
The pressures show no sign of abating with the Chicago Board
of Trade corn, soybean and wheat markets rising 15 to 21 percent since the start
of this year, while US cocoa is at a 24-year high and arabica coffee at a
10-year peak.
Wheat prices have been driven higher by drought in key
growing such as Australia, Eastern Europe and northern China, export
restrictions in Argentina, Russia and Kazakhstan coupled with growing demand in
countries like India and China.
US spring wheat, used to make high protein flour, hit an all-time high on
Monday, and US wheat inventories are projected to reach their lowest level in 60
years by the end of the marketing year on May 31. - Reuters
