Some good news: Food prices on the decline
Posted
Oct 09 2008, 02:52 PM
by
Anthony Mirhaydari
Rating:
With everyone cowering at the financial Armageddon apparently upon us, let's talk about something positive for a change. In a move that mimics the huge decline in energy prices over the summer, food prices are now falling off and providing some much-needed relief to downtrodden consumers.
Since January, wheat flour is down roughly 32% while corn and soybean oil prices are down 11% and 17%, respectively. Reasons include a rethinking of the biofuel initiative, emerging market turmoil and falling crude oil prices pressuring ethanol refiners.
While we'll all benefit at the checkout counter, the trend will help the nationally branded food companies that have taken price increases to protect margins. Remember that these companies, while benefiting from the consumer shift away from restaurants and to grocers, have seen lots of pushback on commodity-driven price hikes.
For this reason, less-expensive generic items have seen big sales increases at the expense of the national brands. A reduction in primary food costs, as well as transportation and packaging expenses, will allow the big brands to rollback price points and recapture market share.
For example, look at Kraft. The company's commodity costs are running 4% higher than at the end of 2007 -- far below the 13% gain management was guiding. Unfortunately, according to research by Credit Suisse analyst Robert Moskow, point-of-sale data shows that the firm is losing market share in 15 out of its top 20 product categories: "Price increases have led to dramatic declines in cheese, cookies, and crackers."
Not surprisingly, Kraft started rolling back price increases on cheese during the third quarter. Look for these price cuts to continue.
Robert thinks General Mills, Kellogg, and Heinz will do especially well in this environment. While Kraft has seen a 12% reduction in unit volume for the four weeks ending in September, General Mills, Kellogg, and Heinz escaped with low single-digit declines. My guess is that while consumers don't see a big difference between cheddar cheese from Kraft and the store brand, they have a special attachment to their Frosted Flakes.
(Disclosure: I don’t own or control shares in any of the companies mentioned.)
Related reading:
Will this be a depression?
Why egg prices are a shell game
The supermarket that beats Wal-Mart's prices
