NORWALK, Conn. — Potential commodity price volatility was the top concern expressed by the chief financial officers at 106 food, beverage and agriculture companies in a recent survey conducted by GE Capital.
Commodity pricing was listed as the point of greatest concern by 44% of CFO respondents, followed by food safety, listed by 29%, and labor costs, listed by 13%. Other points of concern included competition from private label, shifts in consumer preferences and the changing retail landscape.
Although prices for many commodities stabilized in 2009, the markets went through a period of severe volatility in 2008, noted Dennis Krause, industry leader of food, beverage and agribusiness for GE Capital. After averaging about $2.50 per bushel for years, corn prices rose to $4 per bushel in December 2007, and continued heading up. Prices peaked at more than $8 per bushel in June 2008, and then fell back to $4 by the end of the year. Other important commodities, including wheat and soybeans, faced similar problems during the year, causing significant spikes in the prices of animal feed, corn syrup, flour and other basic ingredients.
“It's no surprise that commodity pricing, and the ability to hedge those commodity prices or pass those cost increases on to consumers, are at the forefront of concerns for food CFOs,” said Krause.
“Consumers will not accept constant cost increases [which would allow suppliers] to pass those costs along. So, that resulted in significant margin compression for food companies. And, during that period of high inflation for corn and grain, these companies were locking in hedges — who knew whether corn could have gone to $12 per bushel?”
The markets were more stable in 2009, allowing companies to better predict their input costs and return their margins to more typical levels. But, this survey indicates some concern about whether an improving economy might also mean a return of volatility to the markets.
Despite these concerns, these CFOs were optimistic about future business conditions. Only 2% of respondents said that they expect their company to downsize or reorganize during the next one to three years, while 48% expect moderate or rapid growth during that period, and 50% expect cyclical or limited growth.
Similarly, 59% of respondents said they expect their company's profitability to improve during the coming year, while 23% expect profits to remain flat in 2010.
In response to shifts in consumer spending caused by the recession, 44% of CFOs said that their companies had lowered pricing, while 34% said they had increased the use of in-store promotions and coupons. Twenty-nine percent also said they had increased volume per package while keeping price constant. For many, these strategies were effective. Fifty-nine percent said the downturn had given their company the opportunity to gain market share, while 20% said the economy had restricted opportunity, and 22% said their position in the market was negatively affected.
And, in a sign that many companies continue to view the green movement as a long-term trend, 48% of CFOs said their companies had continued to implement sustainability initiatives last year, in an effort to reduce environmental impact and production costs while boosting product image.