Food companies seek commodity experts to stabilize costs

By Sarah Hills

- Last updated on GMT

Related tags Soybean

Major players in the food industry are looking for experts in commodity procurement to tackle volatile raw material prices which have eaten into profits, according to reports.

Food manufacturers are now turning to companies such as Cargill, ADM and Bunge for traders who understand the temperamental market place for goods such as corn and wheat, according to headhunter Russell Reynolds Associates.

The move suggests that food firms are not viewing the turmoil in the market place as a short-term problem but a long-term challenge.

Jim Hinds, a managing director at Russell Reynolds, told “Commodity pricing and therefore the sourcing and procurement of that has now become a fairly consistent theme on a company’s strategic agenda, when two or three years ago it never really was.

“It is a strategic imperative for these businesses to make sure that they are getting the best possible prices on commodities because it is impacting them right they way through the supply chain.”

He added that they were seeing areas such as procurement playing a much more significant role within an organization, whereas previously it was considered a narrow function.

Food companies are also overhauling the way they buy and hedge commodities by purchasing complex financial trading systems as well as hiring traders from trading houses such as Cargill, according to an article published in the Financial Times.

Michael Schwartz, of Triple Point, which designs trading software and is based in the US, is quoted saying: “Consumer industry companies are showing interest in managing their commodities exposure now in a way very much similar to the energy and metals companies.”

And Brice Russell, chief procurement officer for Mars, told the FT it was difficult to find experienced people and firms were poaching people from each other as well as from commodity trading houses.

The FT said Kellogg hedged 90 per cent of its raw material exposure this year and PepsiCo was also hedging more. And Unilever recently created a position of chief purchasing officer.

Price hikes and profits

Food manufacturers and ingredient companies have all been feeling the pinch.

In January financial results released by food giants Kellogg and Kraft showed a drop in earnings on the back of mounting costs for raw ingredients.

At the same time ingredient suppliers are attempting to pass on higher input costs to their customers. Caravan Ingredients, a manufacturer and supplier of bakery and food ingredients in the US, said in August it had been forced to push prices up because of hefty commodity increases, including soybean oil and wheat over the last year.

And Solae announced in April that it would raise prices of its soy protein ingredients around the world by up to 30 percent in order for it to be able to maintain its R&D activities.

Days earlier the company increased prices for a broad range of its soy lecithin products because it said the higher cost of energy and commodities had eaten into the margins of its lecithin business.

Soy protein is used in the food industry as a low-fat source of protein and Solae said that soybean prices have soared over the past year, nearly doubling in price.

Long-term shift

In May the international ratings agency Fitch said that rising commodity costs could result in permanent structural changes for the American food industry.

Its report, called "A reference guide to US food and restaurant bankruptcies and fallen angels"​, said that higher prices were one of the leading stresses for companies struggling financially as increased costs have reduced margins.

Wesley Moultrie, senior director at Fitch, said at the time: "The global supply and demand dynamics for agricultural commodities may have permanently shifted, thus increasing companies' cost structures for the long term."

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