CSM today announced it would raise prices for bakery supplies by up to 20 per cent in 2008, estimating that increasing commodity costs have added €190m to the company's operating bill.
Like many other ingredient suppliers in the US and Europe, CSM has made the difficult choice between bearing the brunt of high commodity costs, or passing these price hikes on to processors.
"We are increasing our product prices by 10 to 20 per cent to offset the impact of higher input costs," said chief executive officer (CEO) Gerard Hoetmer at today's investors' meeting. "These price increases are unprecedented but absolutely necessary."
It is unusual for CSM to give market updates outside normal reporting periods, Hoetmer added. However the company felt it to be necessary giving "unprecedented" rise in raw material costs in 2007.
In 2006, the company spent about €1bn on raw materials, the company said in its official update.
These materials cost an extra €190m in 2007, and are expected to have the biggest affect on the company in 2008. CSM has so far been protected from the full impact of the commodity cost increase through a centralised procurement process and by hedging on the financial markets.
"Nonetheless, we remain fully focused on our aim to achieve the financial targets for 2008 normalized for inflation in our selling prices," Hoetner said.
CSM claims to be the largest supplier of bakery products worldwide. It produces and distributes a range of bakery products and ingredients for artisan and industrial bakeries, and for in-store as well as out-of-home markets.
It also produces a variety of lactic acid products for the food, chemical and pharmaceutical industries. The company has annual sales of about €2.4bn.
Earlier this year, CSM subsidiaries Purac and Caravan also announced that they are increasing prices.
Purac said this month that 95 per cent of its lactic acid, lactates, gluconic acid and gluconates would be affected, due to higher costs for carbohydrates and energy.
The company blamed these surging costs on the double whammy of the restructuring of the sugar regime in the European Union, and the strongly increasing demand for carbohydrates to produce bio-ethanol.
However, the Netherlands-based CSM and its subsidiaries are not alone, as the price of raw materials is rising across the board.
Drought in Australia, adverse weather in Europe, foot and mouth in the UK are all contributing to a short fall in the normal supply of the major commodities such as grains, meats and milk.
These unforeseen events on the supply side together with the increased demand from China and the squeeze is on operating budgets, and perhaps even production output.
The sharp rise in the grain market has been well documented by reports from the Food and Agriculture Organisation (FAO), which forecasts no let up in the near future.
And a Confederation of Food and Drink Industries of the EU (CIAA) report in July found that manufacturers were paying 35 per cent more for wheat, an average 50 per cent more for dairy products, by 25 per cent more for sunflower oil.