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Focus on premium can offset ongoing wheat price hikes, analyst

By Jane Byrne , 03-Nov-2010

New research from Euromonitor suggests a moderate but sustained increase in wheat and corn commodity prices from now until 2015 but the analysts predict that manufacturers focusing on premium and private label lines will offset rising input costs.

Food manufacturers offering high added value bakery and cereal lines will be in a far better position to pass on price increases to consumers. This is because premium consumers show higher elasticity to prices than those in the mass market/mainstream.

In addition, private label bakery manufacturers will be in a relatively good position to internalise some of the commodity-induced price increases through economies of scale linked to mass production,” claims Francisco Redruello, Euromonitor International's senior food analyst.

The analyst stresses though that those manufacturers that occupy a space in between the premium and economy price bracket will be the most heavily affected by prospects of food commodity inflation in the medium term and thus, accordingly, will have to adjust their sourcing strategies the most.

Wheat prospects

Global wheat prices have risen by 37 per cent from October 2009 through to September 2010. Moreover, they have been steadily rising since August 2010 when widespread fires in Russia prompted a self-imposed ban on wheat exports from that country.

The move sent shockwaves through global commodity markets, with traders fearing scarcity of supply and an immediate escalation in commodity prices resulted.

More recently, price rises have been furthered over due to poor prospects for wheat output this year in Canada, which is expected to be 25 per cent lower than in 2009, according to agricultural crop specialists in the country.

Downplaying

Current global wheat prices, however, are still around 40 per cent lower than the peak reached in March 2008 when average FOB monthly prices exceeded US$439 per tonne.

Furthermore, according to FAO estimates, wheat stocks in 2011 will stand at a similar level to the previous season - 196 million tonnes (2009/2010) versus 188 million tonnes (2010/2011).

And, even factoring in a drop in production of around 17 million tonnes (30 per cent of total Russian wheat crops), adjusted stock levels will likely remain only slightly lower than 2008/2009 levels of 178 million tonnes, claims the FAO.

Population trends

But Redruello explains that despite the relative stability of year-ending stocks and crop output, wheat and corn commodities are predicted to remain under pressure over the medium to long term due in no small part to underlying global population growth trends.

“There are concerns in the industry about the medium-term capacity of food producers to meet the needs created by future population growth. Between 2009 and 2014 alone, the global population is projected to grow by around 400 million, according to UN estimates. Most of this growth will take place in meat, wheat and corn-hungry emerging economies in Asia-Pacific, North Africa and Latin America,” said Redrello.

The analyst thus urges large international companies whose activities rely heavily on wheat and corn to try and establish a sustainable sourcing strategy in the medium term.

“Manufacturers relying on short-term trading will be highly exposed to price hikes linked to 'nervous trading'– like the ones seen in wheat immediately after the recent wildfires in Russia.

Interestingly, geographical diversification might also help international food manufacturers to offset price increases linked to the volatility of a particular currency,” he added.

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