Monday, 2 May 2011

Watch the Size of that Cereal Box

Three stories that tell us a little more not just about who's wining and losing as food prices go up, but the ability of various parts of the food industry to adjust. The fallout from 9-11 (still with us even though Bin Laden has been dispatched) ramped up production of biofuels in the United States, and the heavy subsidies continue to enrich corn and soybean producers there.  This in turn has increased the price of livestock feed. When that's combined with drought  in western U.S. ranching country, the U.S. beef herd is at its lowest numbers in decades, so prices have reached record levels.  Canadian farmers will see some benefits too (Western Canadian farmers in particular where grain and livestock prevail, with much easier access to the U.S. markets) but as one PEI beef producer told me when I suggested  things must be getting better, he said while cattle prices are back to where they were six years ago when mad-cow was first discovered,  the cost of everything from fertilizer to farm equipment is much higher. Throw in hundreds of thousands of dollars of loans used to survive through the lean years, and the picture while better, still isn't good. I was going to argue that farmers just never seem to be happy, but I realized he was right.

Consumers will see the fallout by paying a little more money, but also getting a little bit less in the box or bag.  Food retailers and processors have so much invested in providing "the lowest price", that they're cleverly trying to protect their bottom line in a different way.


Grocers scramble to offset higher food, fuel costs

Call it the incredible shrinking package. Loblaw Cos. Ltd. (L-T139.880.521.32%) recently scaled back to 750 grams from 800 grams the amount of cereal in a box of one of its President’s Choice granolas, but has also raised the price to $5.79 from $4.99 since last year.

Loblaw is far from alone in downsizing packages and upsizing prices. It is a common practice in the grocery industry, underscoring how supermarkets today are racing to find ways to ease the pain of higher food and fuel costs while shoring up profit margins.

After having prospered last year from a strong loonie despite food deflation and escalating competition, grocers are preparing for an era of food inflation.

Even as profit margins improve – helped by a rising Canadian dollar that lowers many purchasing expenses – Loblaw and its rivals are struggling to make sales gains in a the cutthroat environment that has seen discounter Wal-Mart Canada Corp. rapidly expand into food. On Wednesday, when Loblaw reports its first-quarter results, the country’s largest grocer is expected to shed more light on how it’s grappling with limited growth opportunity in the food aisles in a period of soaring costs.

While moderate inflation is an ally to the food retailer, price increases of more than 2 to 3 per cent can spell trouble, Loblaw president Allan Leighton has warned. Recession-shaken consumers are sensitive to dramatic price hikes, and simply switch to cheaper alternatives rather than shell out more.

When prices jump beyond 2 to 3 per cent “then it really starts to whack the market,” Mr. Leighton said in February. “I’d rather be in a place of deflation than a place of high inflation.”

In March, the tab for food bought in stores jumped 3.7 per cent, marking the biggest year-over-year increase in 19 months, according to Statistics Canada. Surges in global commodity prices, spiralling fuel prices and bad weather in the southern U.S. are continuing to drive up prices. And higher rates at the gas pump threaten to curb consumer spending.

Grocers have reported lower prices than Statscan because their customers trade down, opting for cheaper alternatives than the items included in the federal agency’s sample of groceries. But the retailers acknowledge that they’re starting to raise prices. Already this year, Loblaw hiked prices of vegetables, fruits and meats. Other price adjustments are more subtle, such as shrinking packages or launching new products.

In the case of its PC Blue Menu Raisin & Almond granola, Loblaw last week was still touting an 800 gram box on its website even though its stores carried a shrunken 750-gram package – 6 per cent smaller but almost 16 per cent more expensive than last year at its conventional supermarkets.

At the same time, the retailer stocks a new Blue Menu almond-vanilla Omega-3 granola in the same size box as the raisin-and-almond version but with just 600 grams of cereal – at the same $5.79 price.

In response to a cautious consumer, grocers try to camouflage price increases by downsizing packaging, rolling out new products or adding healthy-for-you components to justify higher rates, said Michael Mulvey, marketing professor at the University of Ottawa Telfer School of Management.

Consumers often don’t readily notice a different package or content size, Prof. Mulvey said. “So potato chips all of a sudden contain 15 per cent less chips but the bag won’t change much, in terms of its size.”

And grocers can get away with higher prices if they’re providing a more convenient or healthy product, he said. He cited the example of Pepperidge Farm’s Goldfish cheddar snacks which, at Loblaw, cost $3.29 for both a 200-gram and a 168-gram package. Because the latter consists of six 28-gram snack packs, “they’re providing consumer value, in the sense that it’s more portable, easier to pack,” he said. “It is a very effective way of selling less food for the same price and helping the bottom line.”

Another grocer strategy to deflect attention from inflation is running “last-blast” promotions before jacking up prices, retail analyst Perry Caicco at CIBC World Markets said in a recent report. Or, as Loblaw did when it unveiled its new almond-vanilla granola, the retailer initially featured it at a lower price of $3.49 before raising it to its current $5.79.

And as grocers focus on dealing with spiralling food costs, they feel strains on another front: higher prices at the pump. In a report in March, market researcher Nielsen Co. predicted that the double whammy of rising gas and commodity prices will prompt consumers to follow historic patterns: make fewer trips to the grocer, eat out less, switch to cheaper shopping alternatives and use more coupons.

“The impact on household budgets can be significant,” it said. A 10-cent-a-litre increase in gas prices slices consumer spending by $30 a month, while a 50-cent hike translates into a $124 monthly cut.

Still, higher gas prices can have a silver lining for grocers, Prof. Mulvey said. Consumers stay home more, rather than dine out or travel, forcing them to buy more groceries because they still have to eat.

Recession-free agriculture

April 29, 2011

Since 2007, much of the American economy has stumbled through a difficult period, but agriculture-related firms have enjoyed four profitable years thanks to heavy demand for corn and other crops.

A new index of 21 agriculture-related companies, called Agindex, shows their market value increased 8.6 percent a year from the beginning of 2007 through the end of March 2011. During that same period the value of companies in the S&P 500 dropped on average 2.7 percent per year.

The Agindex includes household names such as equipment-maker Deere & Company and seed-and-chemical firm Monsanto along with lesser-known companies such as fertilizer producer Agrium.

Gary Schnitkey, a University of Illinois agricultural economist, created the index with graduate student Clay Kramer to measure the strength of the agricultural sector. What they found was evidence of the strength of the rural economy the past few years, when crop prices sheltered farm country from much of the worst of the recession.

"Farmers are buying equipment and everything so it does filter out into the general rural sector," Schnitkey said. "The rural economy did fare pretty well."

Even with uncertainties about whether the government will reduce or eliminate programs that subsidize ethanol producers and growers of corn, soybeans and other commodities, Schnitkey said it's doubtful his index or the farm economy could decline any time soon.

"You're going to see pretty high (farmer) incomes for this year and probably next year," he said. "It's hard to see a situation where that moderates a lot."

Prices for corn, soybeans and other crops have soared for several reasons, including a surge in overseas purchases from developing economies in China and India as well as continued demand from U.S. livestock and ethanol producers.

The demand has caused stockpiles to decline and in part been to blame for increased food prices.

As farmers have earned more in recent years, they have bought new tractors, combines and other equipment from companies such as John Deere and Kubota Tractor Corp.

The equipment makers in the index saw their market value increase a total of 51 percent.

Higher prices, coupled with plentiful crops in recent years, have enabled farmers such as Leon Corzine of Assumption, Ill., to buy new equipment. Corzine bought two new tractors last year for use on his 3,000 acres of corn and soybeans.

"You're talking about getting upwards of 250,000 or 300,000 dollars apiece," he said.

But the sector that's had the best four-year run, Schnitkey found, is fertilizer makers such as Agrium, based in Calgary, Canada, and Potash Corp. of Saskatchewan, based in Saskatoon, Canada. Those companies' market values more than doubled.

Most Americans probably have never heard of the fertilizer makers, but the demand for more corn and soybeans has allowed the companies to put a premium on their products.

Not every company on the index did so well. The index's processors, which had to pay high prices for corn, soybeans and other crops, actually lost 4 percent of their value. Those companies include Archer Daniels Midland Company, Bunge Limited and Corn Products International.

Schnitkey noted that most of those companies had very strong first quarters this year.

Despite concerns about reductions in government subsidies for ethanol and some crops, Morningstar analyst Jeffrey Stafford expects the current trend to continue. Farmers can't keep up with the demand for corn, for instance, meaning that stockpiles will remain low.

"It could take multiple growing seasons to return those stocks-to-use levels to kind of a more sustainable average," he said. "You could see elevated crop prices remain for quite some time."

Beef prices at all-time high

April 25, 2011
Source: Reed Fujii

They say happy cows come from California. With all-time record beef prices and plentiful pastures these days, happy cowboys also come from California and other U.S. cattle-raising regions.

"I can't call and complain about anything," said Darrell Sweet, a Livermore cattle rancher and past president of the California Cattlemen's Association.

That's quite a change as the industry has emerged from California's three-year drought and a period of depressed beef prices as costs for grains and other feed soared.

As recently as June 2009, beef cattle being sold for slaughter went for an average 82 cents a pound live weight, the U.S. Economic Research Service reported. In March, the average was rose to nearly $1.16 a pound, a jump of more than 40 percent in less than two years.

Both gross farm and retail beef prices set records in February and then again in March, not accounting for inflation. The agency reported the average retail price of fresh beef was nearly $4.35 a pound in February and ticked up to $4.48 a pound last month.
Backing off buying

The high prices are affecting beef buyers. Consumers are seeking cheaper grades and cuts of beef. Restaurants are watching their profits shrink or must raise their prices even while the economy remains weak. Fast-food giant McDonald's Corp. announced Thursday it planned small price increases as the price of beef rises.

Still, it's a boon for cattle producers.

"Prices are good. They've never been this good before," said Duane Martin Jr., a Galt-based rancher and past president of the San Joaquin-Stanislaus Cattlemen's Association. "This year, we'll make big profits."

He attributed the rise to short supply of beef, as the drought in California and other areas of the nation and low market prices compelled ranchers to sell off their herds. Export demand for U.S. beef is also strong, and there may be a bit of a price bubble in commodity markets.

Martin said the gain is not pure profit, as production costs are also increasing. He said fuel and transportation costs may jump by one-third this year.

"When you're talking about shipping cattle 1,200 miles to Colorado, it adds up pretty fast," he said.

Feed and grain prices, as well as pasture rents, are also rising. And Martin, who has 30 employees in his operation, worries about labor costs, including health care coverage.

"Over the next few years, I expect a big percentage of it to get eaten up," he said. "If not, the prices of cattle falling back, because, like I said, I think they're overinflated."

Daniel Sumner, director of the Agricultural Issues Center at the University of California, Davis, said the primary price driver is the short beef supply.

"One of the things that happened a few years ago: We had these incredibly high grain prices, and beef prices didn't go up, so that meant guys were selling," he said.

"This isn't that you and I and everybody else make so much money we eat steak everyday," Sumner said. "The economy has come back a little bit, but it's not a strong economy."

And it's not that easy to increase beef production. Ranchers need to build up the number of heifers - young cows - to do so.

"Cattle make cattle; the only way you make marketable animals is to have breeding stock," Sumner said.

To do so, however, will further reduce beef supplies in the short run as heifers are held off the market.
Ranchers get more

Sweet said he's seen heifers selling for about $1,900 apiece, roughly twice what they might have brought during the drought, when ranchers were reducing their herds.

He also said foreign demand is also contributing to higher prices.

"The export market is what is really driving this thing," Sweet said. "The export market and the fact that we have a continuing decline in beef cattle numbers."

The U.S. Meat Export Federation, a trade group promoting beef, pork and lamb, recently reported there was strong growth of U.S. beef shipments in the first two months of the year.

Beef exports in that period were 179,460 metric tons valued at $727.3 million, representing gains of 24 percent in volume and 45 percent in price from the same period a year ago. Mexico, South Korea, Canada, the Middle East and Japan are the top five export markets.

Officials at Save Mart Supermarkets said they hadn't received any surge in complaints about meat pricing, but consumers are picking lower-priced cuts.

"A developing trend is the increased popularity in short ribs, stew meat and thin cuts like stir fry strips or carné asada, which are economical and very quick and easy to prepare," said Marty Stephanic, Save Mart's meat director.

All sorts of economic factors play into consumer buying decisions, said Dave Heylen, vice president of the California Grocers Association.

"With the recession we've gone through or are in, we saw considerable change in consumer buying habits in all areas, not just meats," he said.

"Any time there are increases in prices, it's going to impact how consumers purchase," Heylen said. "So sure, it'll have an impact. How much, I can't say."

At the El Rancho Inn-Steak & Lobster House in Stockton, rising costs have hit the bottom line, owner Ray Lecondeguy said.

"I've absorbed everything for the last year or so on beef," he said. He quickly added, "What's even worse is the record lobster prices. I'm paying $44.50 per pound."
Plate prices rising

That's forced him to raise the price for a lobster dinner, but he's holding steady on his rib eye and New York steaks.

"Everything is going up. Everything that's related to agriculture is going up," Lecondeguy said.

Martin thinks the beef market will remain strong for the next several years.

"I've been growing my herd at a rapid pace, and this year I expanded it 40 percent," he said.

He's purchased a few thousand head of cattle being pastured in Wyoming and Colorado and added staff to manage the expansion.

Still, he admits being a bit surprised by the gains.

"I was very bullish on the cattle industry; just not to this degree," Martin said

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