One trip to the grocery store and you know something's gone amiss. What with the rationing of rice and rising food prices, putting dinner on the table can be somewhat stressful. We know that surging commodity costs are pinching manufacturers, who then pass on the higher costs to consumers. But are the companies producing the stuff you chow down on really justified in pocketing every last penny in your paycheck?
The hand that feeds you
Turns out, they aren't. That's right, yummy results in the food sector have been served up all around lately as the inelasticity of food -- and the necessity to eat -- leaves consumers with no choice but to pay up.
Last week, Heinz
So while you're scrounging to buy Corn Flakes for the kids, these brand name food producers are doing just fine for themselves. No, they're not making the big bucks that oil and gas producers like BP and ExxonMobil are pumping out, but Heinz and others are finding ways to actually thrive in today's trying market. People need to eat and they might not be ready to trade down for generic ketchup and macaroni and cheese (yet).
More pricing power for foodies?
Consumer confidence is the lowest that it's been in 28 years; 90% of respondents in a recent poll think that the economy is in a recession and that things will get worse. Everyone is talking about how expensive life has become and how hard it's going to be to sustain the same standard of living.
According to much of the news, the only folks who seem to be prospering in the U.S. today are farmers, who continue to profit from soaring corn and wheat demand.
Since consumers are expecting more price increases, I think food producers may have over-stepped the line in the degree to which they’ve raised their prices. What the average consumer doesn't yet realize is that these price increases aren't only meant to buffer commodity price increases; they're also boosting the bottom line for these companies.
Hedge your bets
The U.N. is meeting this week to discuss global food supply and demand issues. As global demand for food increases, it makes sense to consider adding food stocks to your portfolio. These companies have leverage over consumers as far as how much they can charge before people turn away for cheaper alternatives. Of course, when everyone is hiking up their prices, there aren't many less-expensive choices.
This sector isn't without risks, however. Despite U.S. consumers' expensive tastes, many may decide to go generic in order to stay afloat. After all, a paycheck can only stretch so far. The good news is that the U.S. is only a portion of the equation for most of these companies, so even if the American consumer turns away from Heinz ketchup, the international market may pick up the slack. There's also the risk that commodity prices may continue to increase to a level that pricing can't cover, which could cause trouble.
It's not clear that these foodies will be able to maintain solid sales and margin growth going forward, especially as $4.00 gas prices become reality. Del Monte
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