Download Hedging becomes food and drink to the makers of consumer goods

Hedging becomes food and drink
to the makers of consumer goods
Companies look to hire
commodities traders
By Jenny Wiggins
and Javier Blas
Food and consumer goods companies are overhauling the way they buy
and hedge commodities after being
caught out by increases in the prices
of raw materials that have squeezed
industry margins and cut profits.
Companies are turning to commodity trading houses for the first
time to hire traders and are buying
complex financial trading systems
to help them cope with a new era of
global inflation.
Such decisions suggest executives have realised that volatile
commodity markets are not a shortterm phenomenon but a structural
change driven by ­rising demand
from emerging markets.
Peter Evans, co-ordinator of the
European consumer products practice at headhunter Russell Reynolds
Associates, said companies were
approaching trading houses such as
Cargill, Bunge and ADM to find traders who understood volatile markets.
“If they can buy commodities more
intelligently than their competitors,
that can be a competitive advantage,”
he said, adding that the firm had been
Hedging is second nature
for food groups
financial times excerpt
By Jenny Wiggins in London
Hedging is second nature
for food groups
Food companies were once a little blasé about the price they paid
for the ingredients that went into
their corn flakes, chocolate bars
and yoghurts because in the 1980s
and 1990s, prices of agricultural
commodities were falling.
While many food companies
Food companies were once a little
blasé about the price they paid for
the ingredients that went into their
corn flakes, chocolate bars and yoghurts because in the 1980s and
1990s, prices of agricultural commodities were falling.
While many food companies took
the precaution of hedging some of
their key ingredients – Mars, the
owner of Snickers bars, has been
hedging cocoa since the 1960s –
they did not have to worry too much
about being caught out by unexpectedly big price jumps.
Today, that luxury has vanished.
Soaring global demand for commodities has driven prices of all
kinds of food ingredients, from corn
to cocoa to coffee, to new highs, and
more than a few food companies
have been unpleasantly surprised.
On Friday, Hershey, the US chocolate group, became the latest in a
long line of food companies to warn
that its commodity costs – which
include sugar and peanuts as well
as cocoa and are up as much as 45
per cent since the start of the year –
were rising faster than expected.
The company said it would spend
up to $12m hedging its 2009 costs –
it expects cost increases next year to
be double this year’s – and take a hit
to third-quarter profits.
Other companies caught out by
soaring commodity prices include
Hershey’s competitor Cadbury,
which recently said it was proceeding with a new round of restructuring after finding rising raw material
prices “a stronger challenge” than it
had previously anticipated.
Meanwhile, Unilever, the multinational food and household products
group, which estimates its commodity costs rose by €1bn ($1.47bn) in
the first half of the year, has warned
it will face its biggest ever annual
rise. Analysts estimate this will
amount to €2bn.
Companies have been trying to
counter higher costs by raising the
wholesale prices for their products.
On Friday, Hershey said it was putting through another round of price
increases (it raised them 13 per cent
in January) on its chocolate bars and
other confectionery, lifting them by
a further 11 per cent.
But companies are starting to find
that consumers are reluctant to pay
more for groceries as inflation rises
and disposable incomes fall, and
many price increases are being followed by drops in sales volumes.
Good commodity risk management
is consequently becoming an essen-
tial part of remaining profitable.
Michael Steib, consumer goods
analyst at Morgan Stanley, says:
“Companies are more focused on
hedging, particularly the ones that
got burned.”
Although food companies have
long employed “procurement” people with logistical skills in sourcing
commodities, they are now looking
for people with experience in trading commodities.
“Consumer industry companies
are turning into agriculture commodities trading houses,” said one senior
commodities banker in London.
Meanwhile, consumer industry bankers say investment banks
are putting money in commodities
teams that give food and consumer
goods companies advice on how to
hedge their risk exposure.
When corn prices rose or fell 5
cents per bushel per day, companies could afford not to be hedged
because the price movements were
not big enough to lower profits.
But now that they are swinging by
30-40 cents a day, and prices have
soared – which means they account
for a bigger proportion of total sales
– companies are being hit with considerably higher additional costs.
Pilgrim’s Pride, the US group
that claims to be the world’s biggest
took the precaution of hedging
some of their key ingredients –
Mars, the owner of Snickers bars,
has been hedging cocoa since the
1960s – they did not have to worry
too much about being caught out
by unexpectedly big price jumps.
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hired to fill a new role of global commodities procurement director at one
of the biggest food groups.
Prices of some commodities, such
as corn and wheat, are now fluctuating as much in a single day as they
did in a year in the early 1990s.
Brice Russell, chief procurement
officer for food group Mars, said
companies were poaching people
from each other as well as from
commodity trading houses because
it was hard to find experienced people.
“A lot of managers have not been
in an inflationary environment before…they have to figure out how
to manage it,” he said.
Michael Schwartz, chief marketing officer at Triple Point, a USbased company that designs trad-
ing software for oil companies,
miners and Wall Street banks, said:
“Consumer industry companies are
showing interest in managing their
commodities exposure now in a way
very much similar to the energy and
metals companies.”
Rick Hughes, vice-president
of global purchases at Procter &
Gamble, which hedges all kinds of
commodities, said: “We’ve gone
longer and hedged a broader portion
of our portfolio.”
Unilever created a position of
chief purchasing officer a few
months ago. Kellogg’s, which has
hedged 90 per cent of its raw material exposure this year, said it
hedged earlier, and PepsiCo said it
was also hedging more.
Copyright The Financial Times Limited 2008