The U.S. Department of Agriculture has forecast an increase in food prices of 5% to 6% this year, which would be the largest annual increase since 1990. The USDA also predicted a 4% to 5% increase in food prices in 2009, which, if true, will make it the third straight year with an increase of at least 4%.
This situation is creating an opportunity for processors of retail food, because it’s driving many consumers to cut back on visits to restaurants. This is a main reason why most major food retailers showed same-store sales growth over the first quarter of 2008, while restaurant sales are stagnant or declining-even though the inflation rate for food away from home (4.1%) is lower than for food at home (5.5%).
According to a report by Holland’s Rabobank, which specializes in financial services to the food and agriculture industry, a “barbell effect” is occurring among food shoppers. Many of them are going for either low prices at one extreme, or high value at the other. The high-value end of the “barbell” could consist of several attributes, including quality, healthiness and convenience.
In general, analysts say, the quest for high value is benefiting food companies with high-profile brands, because they’re able to raise prices to cover their ingredient costs without driving consumers to lower-cost alternatives like private label.
“There’s no oversupply of Oreos, so the packaged-food companies have been able to offset enough inflation to post profit growth,” Edward Jones analyst Matt Arnold told the Wall Street Journal.
Kraft Foods, maker of Oreos, announced that its revenue for the second quarter of 2008 rose 21% over the same period last year, resulting in an income gain of 9.1%. Much of that revenue gain came as a result of an average price increase of 7% for the company’s products, which resulted in a sales decline of only 1%.
Similarly, Heinz reported growth in the most recent fiscal quarter of 15% in sales and 14% in earnings.
However, other companies are running into problems. Tyson Foods, hit hard by increases in feed costs, posted a 92% loss in income for the last quarter, even though revenue was up 3.5%. Most of the income loss was caused by a $44 million operating loss in Tyson’s chicken business. Part of the problem was an oversupply of meat, poultry and other unprocessed or minimally processed foods.