Tags: commodities

Demand Rationing Seen as Food Prices Soar

Sunday, 13 Feb 2011 06:10 PM


As commodity markets once again show signs of plateauing after their latest gains, the focus is shifting toward the threat that soaring grain, metal and energy costs could begin to erode demand.

Food prices are already at record highs. Manufacturers like Kraft Foods Inc and PepsiCo have sounded plans to pass on to consumers the high commodity costs squeezing their profits.

Global reaction to higher prices has varied. High food prices were one factor that prompted people in Tunisia and Egypt revolted to topple presidents, but consumers in the West have taken the pain more quietly.

The end result could be rationing, which ultimately should reduce demand.

"It's not a question of whether there'll be demand destruction, it's a question of when," said Adam Sarhan, founder of Sarhan Capital, the New York-based financial advisor.

"Eventually, you're going to reach a tipping point and people are going to say enough is enough and start rationing what they buy."

China's trade data this week will give markets an idea if the giant grains consumer has not let up on imports -- another factor that could keep prices up.



World food prices rose for a seventh straight month in January, hitting record highs, the United Nations' Food and Agricultural Organization said.

A Reuters poll last month indicated that U.S. corn, soybean and wheat prices were only expected to fall as much as 5 percent by the end of the year after rising as much as 50 percent last year.

The last time the world was in upheaval over food prices was in 2008, when food companies raised prices more freely before global markets collapsed altogether, leading to the financial crisis.

This time, foodmakers are a lot more cautious, although commodity costs are almost as high as in 2008.

Tyson Foods declared huge profits in the last quarter by passing higher meat costs to customers.

But Kraft, which makes Maxwell House coffee, Oscar Mayer lunchmeats and Velveeta cheese, is only now contemplating a price hike after posting weak fourth-quarter results, and lowering earnings targets for the year.

PepsiCo Inc, whose products range from Pepsi-Cola to Tropicana juice to Frito-Lay snacks and Quaker oatmeal, is in a similar situation.

Investors will be watching if other prominent food companies reporting quarterly earning this week, including soup maker Campbell Soup Co and beverage maker Dr Pepper Snapple, to see if they are also seeking to raise prices.

Most of the raw materials that produce the world's staples are trading at their highest levels since the financial crisis.

Rice, one of the world's most abundantly consumed crops, hit 27-month highs last week.

Sugar's rise to 30-year peaks has shifted demand from the natural sweetener to corn-based syrup at a time when U.S. corn supplies are projected to be at their lowest in 15 years.

U.S. corn futures have hit 31-month highs and may have to go higher if the United States intends to fend off export demand to ensure it does not run out of supplies before the next harvest.

For U.S. farmers, particularly, the period between now and March will be a crucial time for deciding which crop gets more acreage as they await a government report next month estimating much plantings there are in corn, soybeans and wheat.

© 2015 Thomson/Reuters. All rights reserved.

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