Return of inflation in food business?

CHICAGO Fri Mar 12, 2010 3:18pm EST

A labourer displays a handful of lentils which he was preparing to package for sale at a market in Karachi October 11, 2009. REUTERS/Akhtar Soomro

A labourer displays a handful of lentils which he was preparing to package for sale at a market in Karachi October 11, 2009.

Credit: Reuters/Akhtar Soomro

CHICAGO (Reuters) - An improving global economy could help food, restaurant and beverage companies start to sell more sodas, sandwiches and suds.

But it could also bring back some of the issues from a couple of years ago, including higher commodity prices, greater demand in developing countries that pulls on finite supply of crops, and a rekindling of the debate over whether crops should be used for food or for energy.

Those are likely to be key topics as food and beverage executives and farm industry experts attend the Reuters Food and Agriculture Summit in Chicago and Asia, March 15-18, with representatives from agribusiness giant Cargill Inc CARG.UL, brewer Molson Coors Brewing Co (TAP.N) and fertilizer maker CF Industries Holdings Inc (CF.N) among those participating.

"They'll probably be talking about the world food need issue, primarily from India and China, and of course the overall economy and what that could mean for demand here in the United States," said Rich Nelson, analyst with Allendale Inc.

After a run to record highs in 2008, the worst economic slump in decades kept a lid on grain prices last year. But a healthier economic picture was expected to reignite demand in 2010.

U.S. farmers harvested record-large corn and soybean crops in 2009 and South American farmers are currently harvesting their largest-ever soybean crop and a near-record corn crop.

Wheat production in the United States and several other major suppliers was expected to decline this year following huge crops in each of the past two years.

Biofuels like corn-based ethanol and biodiesel made from soybean oil will also be in the spotlight in 2010, as producers await key decisions on higher ethanol blend rates and tax credit extensions needed to keep biofuels competitive with fossil fuels.

DRIVING UP COSTS?

Meanwhile, commodities markets will continue to attract money flow from investment funds and others seeking a natural hedge against inflation.

"We would expect to see investment funds continue to pour into commodities in 2010. I think this year you'll see more of the pension funds -- the last bastion of Wall Street which has been stuck mostly in stocks and bonds. That could be where most of the brand new money comes from," Nelson said.

More demand for commodities will likely drive costs for items like corn, wheat and energy higher for food makers. Most food company executives have said that they expect commodity inflation to return in 2010, but not to reach the levels that were seen in 2008.

Companies were able to raise prices then in order to counter some of that inflation. But with the economic recovery in a fledgling state, manufacturers have been more prone to offer promotional discounts to spur sales volume and are not likely to be able to raise prices any time soon.

"You've got a recovering economy, albeit slow, and you've got shoppers that are continuing to be nervous and will not return to spending levels of the 2006-2007 era for quite some time," said Ken Harris, CEO of consulting firm Kantar Retail U.S.

Many beverage makers have said it will be difficult to increase prices this year, and are instead hoping to drive revenue growth with volume gains.

There is also renewed chatter of mergers in the space, given PepsiCo Inc's (PEP.N) recent purchase of its two largest bottlers and Coca-Cola Co's (KO.N) plan to buy its largest bottler's North American operations.

One of the potential beneficiaries of these moves is Dr Pepper Snapple Group Inc (DPS.N), which received a $900 million payment from PepsiCo to let it continue to distribute Dr Pepper Snapple brands, which include 7UP, Sunkist, A&W and Canada Dry. Analysts expect Coke will eventually pay Dr Pepper something similar.

Dr Pepper, whose CEO, Larry Young, is one of the summit guests, plans to use some of that money to pay down debt. Its board also authorized the repurchase of an additional $800 million in shares. The company, whose wide portfolio of flavored sodas has helped it in the downturn, forecast 2010 earnings of $2.27 to $2.35 per share on sales expected to rise 3 to 5 percent.

For 2009, Dr Pepper's first full year as an independent company, it earned $2.17 per share on net sales that fell 3 percent, hurt by no longer distributing Hansen Natural Corp HANS.O drinks and by currency exchange rates. Excluding those items, 2009 sales rose 2 percent.

(Writing by Brad Dorfman, editing by Matthew Lewis)

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