Cranswick‘s share price fell almost 28 per cent this week to 555p, as soaring soft commodities prices created yet another victim. In a trading statement, the sausage and cooked meat producer revealed that its profits this year will be hit by higher raw material costs as the group struggled to pass inflationary pressures on to customers. In fact, its food division is even experiencing retail price deflation, despite higher sales volumes.
Cranswick is not the first food producer to succumb to soaring soft commodity prices. The whole sector experienced a drastic de-rating last year as raw material costs took a big bite out of food manfucturers’ profits. But after a tough year in 2007, there could be some light at the end of the tunnel. “After a long bear market for soft commodities, the era of cheap food is definitely over,” says Richard Lucas, analyst at Ambrian Partners. “This year, however, we do not expect the price rises to be as dramatic as in 2007, even if there is still some room to catch up.”
Indeed, Mr Lucas points out that the drivers of soft commodities inflation are still intact. Demand from emerging markets is still rising and biofuels are still growing rapidly as governments keep raising their targets, so soft commodity prices are likely to remain high. But last year inflation was amplified by adverse weather events. Milk prices rocketed on the back of strong global demand for dairy products, but the poor weather in Europe and flooding in the UK also played a part. Lately, this short-term impact has dissipated and spot prices for milk have subsided slightly.
And other factors also contributed to accelerate soft commodities inflation. Mr Lucas mentions market speculation as well as medium-term supply imbalances in commodities such as palm oil. “Investments were drastically cut after the Asian crisis, resulting in crop shortages. But new lands will soon start production and this will help to ease the pressure on prices.”
Against this backdrop, Mr Lucas believes that soft commodities’ prices could appreciate more modestly this year or even subside slightly. “We have a price range between minus ten and plus ten depending on the weather and the level of economic slowdown this year,” he says.
Although many food producers have suffered from higher raw material costs last year, Cranswick’s downbeat statement came as a surprise as the group is regarded in the City as a “best in class” in the food sector. And after this disappointment, the share price will suffer in the short term. So, while Cranswick remains a sound investment in the long term, it appears fairly priced for now at 555p.
Last IC view: Good Value, 19 Nov 2007, at 790p
