With wheat prices rising rapidly on the back of lower-than-anticipated corn planting in the US, reduced production forecasts in Russia and Canada and lower yields in Europe, big buyers of flour such as Premier Foods could face difficult times, said Investec analyst Martin Deboo.
“Looking ahead, we worry about what now looks like the resumption of dramatic wheat price inflation. We would expect the likes of Premier to be paying perhaps £160-£170/t for milling wheat come the autumn.
"Were the current price spike in wheat to persist after the summer harvest, we think Premier would have a c. £120m gross cost recovery challenge on a full year run rate basis. A similar challenge in 2008 proved their undoing."
Shore Capital analyst Clive Black added: “We are keeping an ever-keener watch on the northern hemisphere harvest. Blistering heat in Eastern Europe and Russia is said to have wilted yields, while there is also talk in the trade of variable production in North America.
“We await further guidance from the International Grain Council and the European agencies, but there could be some pressure on milling wheat prices down the line and, as we have argued for many years, wheat is the base crop from which many others follow.”
This could prove inflationary for the bread, cake and biscuit sub-sectors and depending upon any switch in classification (i.e. from milling to feed wheat) could also impact feed prices - and in turn eggs, pigs and poultry, he predicted.
Verdict Research consulting director Neil Saunders added: “With wheat prices so elevated, suppliers and retailers will have to pass across costs to the consumer; and it’s not just in bread, many other grain based products will also rise such as beer.”
Between a rock and a hard place
Their comments were echoed by Finsbury Food Group chief executive John Duffy, who told FoodManufacture.co.uk that bakers were stuck between a rock and a hard place.
“It has been a very difficult six-to-nine months on the input cost side as we have seen significant price increases in butter, which has gone from £2,000/t to £3,500/t. Cocoa and chocolate prices have also gone up a huge amount, and we’ve also seen some recent pricing pressure on packaging and board.”
But Finsbury was “not operating in the kind of environment in which you can easily push through price increases”, he said.
Unless conditions improved, further consolidation in the cake market was inevitable, he predicted. “I don’t see how there won’t be more consolidation. Big sectors that are not exhibiting growth and facing significant input cost inflation generally have to consolidate.”
There have also been pockets of inflation in dairy, notably in cream, Uniq boss Geoff Eaton told FoodManufacture.co.uk. “Wholesale cream prices were up 80% in the first half. Consequently we are well advanced in a process to agree price increases on the affected products with our customers.”
This could dent volumes, he accepted: “There is a risk that we may lose some volume as a result of our need to pass on these unavoidable input cost price increases.”
Food retail inflation
While there was no immediate risk of a repeat of the unprecedented hikes in commodity prices witnessed in 2007-8, population increases and rising dairy and meat consumption in China and India meant prices would not return to the lows seen prior to 2007, predicted agri-food consultancy English Food and Farming Partnerships (EFFP).
“It is now widely agreed by experts, including the OECD and the FAO that agricultural prices will remain significantly above their levels in the early years of the millennium and will display much greater volatility than in the past.”
EFFP, which has developed a retail food price forecast with Cranfield School of Management, said weak consumer spending power in the UK would however make it hard for manufacturers to pass on price increases: “Faced with fragile demand, the food chain will strive to absorb higher raw material and energy prices.”