General Mills CEO: costs will moderate

By Brad Dorfman

CHICAGO (Reuters) - General Mills Inc's (GIS.N) chief executive said on Wednesday that commodity prices are likely to keep going up, though the rate should eventually moderate, allowing the food company to cope with its costs through increased productivity rather than price increases.

"I think that we will continue to see commodity inflation," Chief Executive Kendall Powell said during the Reuters Food Summit. "I think the rate of that inflation will begin to moderate and we'll be able to absorb more of that (inflation) with productivity and we'll get back to more of an equilibrium."

The company, which makes Cheerios cereal, Yoplait yogurt and Progresso soups, has typically counted on productivity, or cost saving measures, to counter rising costs for commodities including wheat and dairy products.

But, like most food companies, General Mills has raised prices in the past year to account for unprecedented spikes in commodity prices caused by growing world demand, the weak dollar, the push to turn corn into ethanol and other factors.

Powell said he did not know if commodity prices would moderate over the next year.

While some food companies have seen volume hurt by price increases, General Mills saw volume as measured by pounds sold increase 6 percent in the third quarter ended February 24, contributing to an 11.5 percent increase in dollar sales.

Even as commodity costs have soared, General Mills has remained committed to investing in marketing and product development to help boost sales in the future.

The company has also not seen cash-strapped consumers trading down to lower-priced private-label products.

"These consumer food brands are very, very resilient and consumers continue to buy our products," Powell said, citing how the brands have fared in previous periods of commodity price increases.

The average price of cereal is 25 cents a serving, a cup of yogurt is 60 cents and other foods the company sells are also at prices consumers can tolerate.

"These are good prices, they are going up slowly. Consumers, we think, can handle the price increases," Powell said, adding that he thought commodity prices would moderate before food prices pushed consumers to the breaking point.

General Mills has also seen growth in its international business, which saw sales increase 20 percent during the quarter, though much the weaker dollar accounted for half of the percentage increase.

Powell said there are many opportunities for the company to grow its international business.

"We'd like to push a little further into central and eastern Europe, we think there's opportunities there," Powell said. "We'd like to push into Saudi Arabia and the lower Gulf states."

The company will also expand more in China as infrastructure for cold foods spreads to accommodate its frozen dumpling and Haagen-Dazs ice cream business, he said.