Price battles looming for food makers

CHICAGO Mon Mar 16, 2009 10:30am EDT

A cashier scans the price of Michael Lipsitz' groceries at the WalMart in Crossville, Tennessee in this March 21, 2008 file photo. REUTERS/Brian Snyder

A cashier scans the price of Michael Lipsitz' groceries at the WalMart in Crossville, Tennessee in this March 21, 2008 file photo.

Credit: Reuters/Brian Snyder

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CHICAGO (Reuters) - What a difference a year -- and a recession -- makes for the food industry.

This time last year, food manufacturers were struggling to raise prices fast enough to keep pace with the soaring cost of ingredients such as wheat and corn.

Now, as companies like Campbell Soup Co, Sara Lee Corp and Unilever Plc prepare discuss their strategies at next week's Reuters Food and Agriculture Summit in Chicago, food makers are fighting to hold onto those price increases as stressed consumers tighten household budgets.

"That is probably going to be one of their greatest challenges -- how can they maintain pricing they have taken at this juncture," said Wesley Moultrie, a Fitch Ratings analyst who follows food companies.

Worries about pricing and brand loyalty are evident in the weakened share prices of name-brand food manufacturers as retailers push their own cheaper private label offerings.

The Standard & Poor's 1500 Packaged Foods & Meats index is down 13.5 percent this year, though that is not as steep a drop as the 16.9 percent decline in the Standard & Poor's 500 over that period.

Perhaps most worrying for the manufacturers, Wal-Mart Stores Inc, a Summit participant, is revamping its own private-label efforts.

The world's No.1 retailer, which is also the largest grocery seller in the United States, is relaunching its Great Value brand this month.

The move could not only put price pressure on manufacturers that sell through Wal-Mart but could reduce the amount of shelf-space available for their products.

LOCKED IN

Commodity prices have fallen from the record highs of last year, but the food companies note that these costs remain high by historical standards.

Many manufacturers are also still locked into last year's higher prices through hedges and won't benefit from falling prices until later this year.

Grain and oilseed prices have fallen about 40 percent in the past year as the global recession has sapped demand, the dollar has soared, and as many investors and speculators who had piled into commodities deserted the market.

World wheat and corn supplies are mounting as record high prices in 2008 encouraged farmers to plant more.

At the same time, demand for grains has been reduced by a big drop in U.S. livestock numbers -- forecast by the USDA to be down about 2 percent in 2009 -- and a struggling ethanol industry that is using less corn.

But the tide could be turning, especially on the ethanol front. U.S. President Barack Obama is solidly pro-biofuel, and is now considering an increase in the ethanol blend rate in gasoline to 12 percent to 13 percent from 10 percent now.

That could add hundreds of millions of bushels of corn demand this year -- and reignite the food-or-fuel debate.

The Summit will also feature the views and insight of executives from leading seed technology companies Monsanto Co and DuPont Co, which owns Pioneer Hi-Bred.

The rivals are vying for market share around the globe as they race to roll out a series of new types of corn, soybean, cotton and other seeds.

Still, the combination of the economic downturn and accompanying drop in commodity prices is threatening farm investment around the world even as adverse weather, particularly drought, eats into crop production.

And opposition to genetically modified crops remains strong in many parts of the world, particularly in Europe.

Food safety issues loom large for industry as a whole.

A recent outbreak of salmonella poisoning linked to products supplied by Peanut Corp of America led to the recall of more than 3,200 products from crackers to ice cream.

More than 680 people in 46 states became ill after eating contaminated peanut products.

U.S. Representative Rosa DeLauro, who chairs the House subcommittee for Agriculture-FDA appropriations, will be among the Summit guests addressing the issue.

Food and agricultural industry trends will also get an airing by speakers from organizations such as the International Rice Research Institute and Meat and Livestock Australia.

The Summit starts on Monday and runs through Thursday.

(Additional reporting by Chris Stebbins in Chicago and Carey Gillam in Kansas City; Editing by Ted Kerr)

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