Food companies to focus on liquidity in 2009: Fitch

By Caroline Scott-Thomas

- Last updated on GMT

Related tags: Inflation

Food companies are expected to seek greater liquidity in 2009 as they are hit by unexpectedly volatile ingredient prices and lower consumer food spending, according to a report from Fitch Ratings.

The report, US Commodity Food Outlook, Focus Remains on Liquidity and Leverage in 2009,​ said that despite lower costs for fuel and agricultural ingredients, companies are still expected to focus on liquidity – making sure their assets are able to be easily converted to cash – and see it as a much more important factor in 2009 than in 2008.

Although the economic downturn is expected to have far-reaching effects, Fitch said that it anticipates the year ahead to be particularly challenging for the commodity protein, dairy and produce industries.

“The extreme and unexpected volatility of key ingredient costs, and the ineffectiveness of some hedging practices continues to cause operating challenges,”​ the report said.

ADM’s liquidity buffer

The evidence of a move towards companies seeking increased liquidity is already mounting. When agricultural foods giant Archer Daniel Midlands released strong second quarter results earlier this month, for example, it outlined its strategy for dealing with the difficult economic climate in the coming year. In particular, it highlighted its efforts to build liquidity as a buffer against volatile commodity markets.

ADM’s executive vice president and chief financial officer Steve Mills said in an earnings conference call: “Long term debt to equity levels returned to much more comfortable levels of 28 percent.”

Less pricing power

The report also highlighted the US Department of Agriculture’s (USDA) reduced expectations for consumer food price inflation, down from 5.5 percent in 2008, to three to four percent this year. This is linked to weaker global demand and food commodity prices, which are expected to stay lower in the coming year as supply has increased.

In view of these projections, the report said: Pricing power for commodity food companies is likely to be limited, causing industry profitability to remain under pressure despite significant reductions in companies’ overall costs.”

It added that companies should therefore prioritize liquidity and debt reduction over acquisitions, “regardless of significant stock price declines and additional assets coming to market.”

Related topics: Suppliers

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