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MANILA - Local food manufacturers are gearing up for escalating commodity prices, which may push domestic inflation, as the United States suffers from the worst drought in half a century.
Lance Gokongwei, Universal Robina Corp. president and chief executive officer, warned of margin pressures because of rising prices of wheat, soy beans and corn as a result of the dry spell in the US. URC manufacturers the Jack 'N Jill snack foods and C2 tea drink, among others.
The Bangko Sentral ng Pilipinas had said the drought was among the upside risks to inflation. The central bank forecast inflation to average at 3.1 percent this year and 3.2 percent for 2013.
In a research note, Metrobank analyst Mabellene Reynaldo said the impact of adverse weather conditions in other parts of the globe was evident in the inflation numbers last month, when inflation shot up to a six-month high.
“As expected, most global commodity prices rebounded in July, driven by price increases in the agricultural and energy indices. Supply concerns for major commodities fueled the price rally which may likely be sustained for the rest of the year,” Reynaldo said.
On top of the price impact of continued tensions in the Middle East, she cited a rally in the grains market caused by drought in the US Midwest, ill-timed rains in Brazil and India, as well as poor rainfall in Australia – all of which led to a 10 percent month-on-month increase in food prices. In the case of maize and wheat alone, prices have risen by 25-30 percent, Reynaldo said.
“Expectation of continued drought is beginning to trigger concerns that this will be a repeat of the 2008 food crisis, especially if countries will start putting export restrictions,” she said.
If the trend continues, increasing grain prices would bid up the cost of meat on pricier feeds, as well s of rice on substitute demand, Reynaldo said.
Aboitiz-led Pilmico Foods Corp., one of the country’s largest manufacturers of flour, said the price of white corn has seen the biggest increase, even as other commodity prices begin following suit.
"We're still not at the height of 2008. We're still below those levels so it's not yet a bad time, but it could get worse depending on the weather. Even Russia is experiencing a dry spell," said Stephen Paradies, Aboitiz Equity Ventures Inc. chief financial officer.
San Miguel Pure Foods Co. Inc., the Philippines’ biggest food company, downplayed the effects of the rising commodity prices. The group owns the Magnolia, Pure Foods, Monterey, Star, Dari Creme, and B-Meg brands.
"We're optimistic the food business will improve significantly. From the first quarter to the second quarter, it has improved significantly," said Ferdinand Constantino, San Miguel Corp. senior vice president, chief finance officer and treasurer.
Jollibee Foods Corp. said it was closely monitoring the price trends particularly of corn, wheat, soy bean and rice.
"Due to the long and complex supply chain and the use of local agriculture produce, however, the impact of these cost increases on JFC's chicken, beef, flour, vegetable oil and rice would be much less and with a lag time stretching as far as six to eight months from the time of the price change in world trading," JFC said.
The dry spell in at least 33 states across the US West and Midwest has reduced corn and soy bean yields and sent their prices surging.
After three straight months of declines, world food prices soared 6 percent in July because of a sharp increase in grain and sugar prices. The Food and Agriculture Organization Food Price Index - a measure of monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar - went up to 213 points last month, up 12 points from 201 points in June.
When all cost-efficiency measures are exhausted, food companies may have no other choice but to pass on the burden of rising costs to consumers.
"Selling prices will have to go up. We have to pass on the cost to the consumers. Whether we can pass on completely, that's a question we can't answer because the market will have to tell us that," said Paradies.
The drought could be a dent, but the threat was not alarming because of the presence of alternative raw material sources like China and the rest of Asia as well as slowing global economic growth, said Astro del Castillo, managing director at First Grade Finance Inc.
Paradies agreed, citing the slowdown in China and the no-growth scenario in Europe. “This will dampen demand for these commodities. This will help offset the lower production, the decrease in demand in the major producing countries like US.”
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