Commodity costs haunt food industry

A worker dries coffee beans in a warehouse in Medan in Indonesia's North Sumatra province February 28, 2011.

LONDON/NEW YORK (Reuters) - Among the host of issues facing the food industry it is rising commodity prices which are likely to be the foremost concern among speakers at next week's Reuters Global Food and Agriculture Summit.

Rising costs will head the agenda when food executives and farm industry leaders attend the summit taking place in Chicago, Europe and Asia from March 14 to 16, with top figures from Sara Lee Corp (SLE.N), Hormel Foods Corp (HRL.N) and Unilever Plc/NV (ULVR.L) (UNc.AS) along with the French and South Korean agriculture ministers among those attending.

Soaring commodity costs are forcing big food groups to push up their own prices and slash internal costs, as they battle to keep their growth targets on track.

But any attempts to push up prices could be undermined as cash-strapped consumers in Europe and North America scan promotions and the blandishments of cheaper brands, while emerging markets slow as competition intensifies.

Commodities such as coffee, cocoa and sugar have hit the highest prices for three decades, while grains, vegetable oils and crude oil have also risen.

Many big U.S. groups such as PepsiCo (PEP.N), Kraft Foods (KFT.N), and Campbell Soup (CPB.N) have already lowered earnings guidance for 2011 due to rising costs, while in Europe the food sector .SX3P has been one the worst performing so far in 2011.

Indeed, PepsiCo Chief Executive Indra Nooyi said her company would not pass on all the commodity cost increases through price rises for fear of turning consumers away.

But some European analysts are more upbeat, saying a combination of price rises, fewer promotions, better procurement and cost savings will help Europe's top food groups to at least maintain profit margins in the uncertain times ahead.

"Rising input costs are not exactly a new phenomenon ... On our estimate the pricing necessary to offset input costs is around 2 to 3 percent at the group level, which would be below the exceptional pricing seen in 2008," said food industry analyst Michael Steib at investment bank Morgan Stanley.

RISING PRICES

Europe's top food groups Nestle SA (NESN.VX), Unilever and Danone SA (DANO.PA) say their commodity costs will rise by up to 10 percent in 2011, but are confident they can offset this and protect margins by raising their own prices and cutting costs.

French Agriculture Minister Bruno Le Maire and South Korean counterpart Jeongbok Yoo will be at the summit to speak on their plans to deal with rising global prices, which partly fueled protests that toppled the rulers of Tunisia and Egypt this year.

The United Nations said global food price hit a record high in February and warned climate change, growing biofuel demand and protectionist measures could drive prices even higher and threaten long-term food security.

Industry watchers also see more mergers and acquisitions on the menu, especially as conglomerates like Fortune Brands Inc FO.N and Sara Lee plan break ups into more digestible parts.

Top executives from both companies will be in Chicago.

Food and drink companies are also looking at deals in emerging markets to expand their footprint into higher-growth regions, at a time when sales are slower in developed markets such as North America and western Europe.

Earlier this month, ketchup maker HJ Heinz Co (HNZ.N) said it planned to buy an 80 percent stake in a Brazilian food company, just days after its chief executive told a gathering of investors and analysts that he had "never seen more M&A opportunities in emerging markets than ... now."

Last month PepsiCo took control of Russian juice and dairy company Wimm-Bill-Dann WBD.N as it seeks a stronger position in emerging markets and in healthier products, another key growth driver for the industry.

At last month's annual meeting of the Consumer Analyst Group of New York in Florida, companies such as PepsiCo, Kellogg Co (K.N) and Conagra Foods Inc (CAG.N) all touted moves they are making to produce healthier products, such as by lowering sugar and sodium levels.

Plenty of themes for the industry to reflect on then in next week's sessions.

(Editing by David Holmes)