Nestle, the world's largest food company, and Kellogg, the biggest US cereal maker, can't raise prices fast enough to sustain earnings growth after the cost of grains, dairy products and meat surged to records.Vevey, Switzerland-based Nestle said on August 7 that first- half profit increased 5.9%, the slowest in four years, as cocoa and coffee costs rose. Kellogg said July 31 that second- quarter net income growth of 3.7% was curbed by expenses of making products from Cheez-It crackers to Pop-Tarts.While corn, used in Kellogg's Frosted Flakes cereal and Nestle's Albers cornmeal, fell 35% from a record $US7.9925 a bushel on June 27, it's still 50% above the level of a year ago. Kellogg's gross profit margins narrowed 2.5 percentage points in the second quarter, partly on higher commodity and energy prices, chief financial officer John Bryant said on a conference call July 31.''The food manufacturers are facing a dilemma,'' Stephen Pope, London-based chief strategist for Cantor Fitzgerald, said in a phone interview. ''If they put up their prices too much, they face falling sales as consumers switch to other brands, but if they don't raise prices, then their margins are eroded.''Nestle CFO Jim Singh said consumers are switching to cheaper products, limiting revenue from brands such as Stouffer's prepared meals in the US. Sales growth in the nutrition division, where margins are among the highest, slowed in the second quarter.Pricier PizzaWheat futures for December delivery traded at $US8.2625 a bushel on the Chicago Board of Trade, 24% higher than a year earlier. Corn traded at $US5.21 a bushel. Cocoa on London's Liffe was at 1461 pounds ($US2792) a metric ton, after rising 54% in the past 12 months.Battle Creek, Michigan-based Kellogg will boost prices in 2008 after costs grew more than expected, chief executive David Mackay, 52, said on an earnings conference call. Domino's Pizza UK & Ireland will add about 10 to 20 pence to the price of a UK pizza because of ingredient and energy costs, CEO Chris Moore said on July 21.Companies are raking through operations for savings to keep rising commodities prices from driving away customers.Cadbury, the world's largest confectioner, is cutting jobs and moving its headquarters from central London, as well as raising the price of Dairy Milk chocolate. That helped CEO Todd Stitzer beat analyst estimates for first-half earnings. The company posted a 48% gain in profit from continuing operations excluding one-time costs on July 30.
Food InflationNestle has dropped 5.2% this year in Zurich. In London, Domino's has climbed 7.2% and Cadbury has dropped 8.7%.Dominos advanced 12.25 pence, or 6.9%, to 189.75 pence on the London Stock Exchange. Cadbury gained 8 pence, or 1.3%, to 627 pence in London, and Nestle gained 98 centimes, or 2%, to 49.30 francs in Zurich.Governments are taking steps to limit food inflation. The European Union scrapped a requirement for farmers to leave 10% of land fallow to try to increase food supply and reduce the cost of agricultural commodities.''Food prices and energy are still elevated, which is causing inflation to stay high,'' Howard Archer, chief European economist at Global Insight, said by phone on August 8.US FeedlotsIn the US, food prices will expand 5.5% this year, the fastest rate since 1989, according to the Department of Agriculture. The cost of beef jumped as the highest corn prices since at least the US Civil War, based on Chicago Board of Trade data, mean US feedlots are losing money on every animal they sell, discouraging production.US commercial feedlots lost an average $US88.78 on each steer or heifer sold for slaughter in June, compared with a loss of $US50.07 in May and a record loss of $US169.80 in March, said Erica Rosa, an economist at the Livestock Marketing Information Center.The United Nations Food and Agriculture Organization's global Food Price Index was up 44% in June from a year earlier.
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