INVESTMENT FOCUS-European food stocks to savour weak grain prices

Fri Jul 11, 2014 7:46am EDT

* Nestle, ABI, SAB Miller, Danone seen as beneficiaries

* Wheat prices near 4-month lows, corn prices also falling

* Lower input costs seen as benefiting European food stocks

* Datastream shows link between lower prices and shares

* Food stocks often favoured in times of market uncertainty

By Sudip Kar-Gupta

LONDON, July 11 (Reuters) - Food group Nestle, rival Danone and brewers Anheuser-Busch InBev and SAB Miller are among major European food shares tipped for a stock market boost from a drop in commodity prices.

Agricultural commodity prices are down for the third month in a row on prospects for better crops, according to the United Nations' food agency, which said on Friday that the outlook for world food inflation looks lower and more stable as prices settle over the next decade after years of volatility.

While it is difficult to quantify the direct impact on companies from the recent drop in the price of staples such as sugar, wheat and corn, some analysts expect on average a one-percent earnings increase for top consumer firms that save money on raw material costs when commodities are cheap.

"For brewers such as ABI, the lower wheat price is a good thing. It would benefit Nestle as well in the sense of lower input costs while Danone would benefit from falling dairy prices," said Andrea Williams, European equities fund manager at Royal London Asset Management.

"All of them would benefit to varying degrees."

U.S. and European wheat prices have fallen to near 4- to 5-month lows, and corn futures have also declined on expectations of bumper harvests. International milk prices - important for Danone - have shown signs of slipping back from highs.

Sugar prices have also weakened, but while this has hurt sugar producers such as Associated British Foods' AB Sugar unit and sugar producer Suedzucker, the broader backdrop of lower prices is expected to benefit European food stocks.

Thomson Reuters Datastream graphics show how falls in the price of wheat and corn can often herald a positive change in fortune for the shares of European food stocks.

POSITIVE SENTIMENT

The companies themselves gave few details on the impact: Nestle said "short-term fluctuations" in commodity markets did not affect the prices of its products, while Danone said it expected "volatility" in the medium term after reporting in April that sales growth had been dented by higher milk prices.

Companies aim to protect themselves against swings in commodity prices by measures including tailored procurement strategies and cost cutting.

Nestle, for example, has in the past changed recipes, altered packaging formats or simply raised prices to deal with periods of high raw-materials price inflation such as in 2007-2008, according to Yasmina Barin, an analyst at Swiss bank SYZ.

Even if this makes it hard to calculate the overall impact of falling commodity prices on a company such as Nestle, which is exposed to markets ranging from coffee and cocoa to wheat and corn, Bank Vontobel analyst Jean-Philippe Bertschy said it would support investor sentiment on the stock.

Shares in Nestle, Danone, ABI and SAB Miller have all been steady over the last two months, but analysts said they were now well poised to move higher.

"We're positive on the food sector and lower input costs would certainly provide an extra support for them," said Sunrise Brokers' equity strategist Christopher Mellor. (additional reporting by Vikram Subhedar; Editing by Jamie McGeever/Ruth Pitchford)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.