Commodity rises to hit profit, warns food maker

Related tags General mills Cent Maize Cereal

There are signs that rising commodity costs are pinching the length
of the food chain with US cereal product maker General Mills
warning that, despite strong fourth quarter figures, the soaring
costs will have an impact in the near future.

The Minnesota-based maker of Haagen-Dazs and Old El Paso brands posted a net profit of $278 million (€228m) for the three months ended 30 May, up more than 20 per cent from $225 million from the year before.

But looking ahead, General Mills said higher commodity costs will have a significant impact this fiscal year.

"Our business plan for 2005 includes commodity costs that are roughly $165 million higher than last year's, along with increases in health-care and restricted stock expense,"​ said CEO Steve Sanger in the earnings report.

The world has lost its grain - corn, wheat, soybean - buffer zone because in each of the last four years total grain production has fallen short of consumption, forcing a drawdown of stocks. As such, soybeans have recently hit 15-year highs and wheat and corn 7-year highs. Wheat, rice, corn and soybeans are all key grains used for sourcing food ingredients found extensively in food formulations by manufacturers such as General Mills.

"When this year's grain harvest began in May, world grain stocks were down to 59 days of consumption - the lowest level in 30 years,"​ said Lester R. Brown at the Earth Policy Institute.

Wheat futures for May 2004 have traded as low as $2.90 a bushel within the last year on the US Chicago Board of Trade but have recently topped $4 a bushel, a climb of 38 per cent. Corn is up by 36 per cent, rice up 39 per cent, and soybeans doubling from just over $5 per bushel to over $10 a bushel.

These price rises are contributing to higher food prices worldwide, including in China and the US, the largest food producers. The American Farm Bureau marketbasket survey, which monitors US retail prices of 16 basic food products in 32 states, shows a 10.5 per cent rise in food prices during the first quarter of 2004 over the same period in 2003.

Price rises range from a 2 per cent rise in the price of milk to a 29 per cent rise for eggs. The price of vegetable oil, up 23 per cent, is beginning to reflect the doubling of soybean prices. Meat prices are up across the board. Bread and potatoes were up 4 and 3 per cent although bread prices do not usually rise much because wheat typically accounts for less than one-tenth the cost of a loaf of bread.

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