Food chain gets cost jolt in PPI data

CHICAGO (Reuters) - Executives setting prices from farms to dinner tables have coped with higher costs for months and handling those spikes may be getting even harder.

Companies across the food chain are raising prices, cutting expenses and in some cases tinkering with portion sizes and ingredients as they deal with increased costs, executives said at the Reuters Global Food and Agriculture Summit this week.

New U.S. government data shows prices paid at the farm and factory gate surged 1.6 percent in February, largely stemming from soaring food and energy costs. The food part of the producer price index rose 3.9 percent, its biggest gain since 1974, with fresh vegetables up a whopping 48.7 percent.

Food companies, facing spikes in everything from corn to apple juice, are wary of passing along too much of the increased costs to shoppers who are already dealing with higher gasoline costs and a continued weak economy.

Hormel Foods Corp (HRL.N) has raised prices on more than half of its portfolio in the past several months to try to cope with rising costs and is studying whether to increase prices again.

"Clearly in this market, we're not looking to expand margins through pricing," said Hormel CEO Jeffrey Ettinger. "We're trying to hold our own."

Sara Lee Corp (SLE.N) is also raising prices to help offset higher costs for ingredients such as pork.

Frank Lucas, chairman of the House of Representatives Agriculture Committee, said the current food price surge should be short-lived, as farmers will plant more grain this spring in response to high market prices.

Lucas, a Republican from western Oklahoma, said he sees higher grocery prices first-hand when he goes shopping for food at home. "I think this is a temporary thing. Yes, it's there," he said, referring to his grocery bills.

CO-OP COST BENEFITS

DineEquity Inc (DIN.N) has benefited from the combined buying power of its Applebee's and IHOP restaurants.

CEO Julia Stewart expects food-related costs to rise about 1.5 percent at Applebee's and at least 3 percent at IHOP, rates she discovered were lower than most other restaurant chains.

"I think finally our purchasing co-op is having that kind of impact, so we were really pleased with that." Stewart said.

The company's franchisees may raise prices when menus are updating during the year.

"We believe both brands can price with inflation," Stewart said.

For Dr Pepper Snapple Group Inc (DPS.N), the biggest cost spike has been in Mott's apple juice, which represents around 5 percent of its total sales. Store brands are prominent in the apple juice aisle, so grocers eagerly await Dr Pepper's moves.

"As we went in to meet with our customers, they were asking us when we were going to take a price because they need to take the price also," said CEO Larry Young.

Near-record high corn prices have pressured companies feeding animals.

"Long-term the industry can't survive these prices with this supply of chicken," said Joe Sanderson, the chairman and CEO of Sanderson Farms Inc (SAFM.O).

Rising costs have also put the brakes on potential deals.

"On the traditional food side commodity prices are having a big impact on M&A," said Greg Pearlman, managing director and head of the food and consumer group at BMO Capital Markets. "We have not seen as much M&A in food.

(Reporting by Jessica Wohl; Additional reporting by Lisa Baertlein, Martinne Geller, Rod Nickel, Brad Dorfman, Emily Stephenson and Charles Abbott; Editing by Sofina Mirza-Reid and Richard Chang)