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US grain volatility will knock industry by September: Analyst

By Kacey Culliney , 17-Jul-2012
Last updated on 17-Jul-2012 at 10:02 GMT

Bakery and snacks firms will feel the impact but bear the brunt: Analyst
Bakery and snacks firms will feel the impact but bear the brunt: Analyst

Price spikes in the US grains market fuelled by a lengthy drought will be felt by bakery and snack manufacturers around September, according to an industry analyst.

A drought in the US and soaring temperatures in the Black Sea region have created a volatile grain futures market that has led to lower yield estimations for the 2012-13 season. The US Department of Agriculture has projected that global wheat stocks for this season will be at a three year low.

As a result, prices have spiked significantly and Francisco Redruello, senior food analyst at Euromonitor International, said that this volatility across the grains sector will have implications for bakery and snack firms in the near future.

“If price rises continue in August, it will increase in-put costs for bakery and snack manufacturers,” Redruello told BakeryandSnacks.com.

It could become a “significant” problem for firms if dry conditions continue, he said.

“Impact on prices will probably start to be felt in September, when current futures contracts expire,” he added.

Manufacturers will bear the brunt…

While input costs will be squeezed, Redruello suggested that, as before, most firms will “take the brunt of rising grain costs”, avoiding any significant end-product mark-ups.

“Retailers, especially in developed markets, have a strong bargaining power and typically accept only a small part of grain inflation,” he said.

Therefore, “in the current recessionary environment, price rises in developed markets are set to be – if only partially – cushioned by the bargaining power of supermarkets and hypermarkets,” he added.

The most significantly impacted will be the smaller manufacturers with low financial capacity to fund mid-term hedging, the analyst said.

The US grains power

Redruello indicated that the US is a fairly significant piece to the wider puzzle as it accounts for around 10% of global wheat output and 40% of global corn output.

Since June 15, corn futures in the Chicago Mercantile have risen by 28%, he detailed, and wheat 37% and soybeans 15%.

Traders working in the feed sector have also been pushed to by grains, as poor output prospects in South America have driven soybean prices, he said, driving up costs.

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