Can food companies survive the large increases in commodity costs ?

Implications: Commodity cost increases (wheat,corn,oil,sugar) are causing havoc with food and CPG companies bottom lines.The significant upward pressures of wheat (+100% latest 12 months) specifically impact all cereal,baking, pasta and many other food companies profits. The key questions surrounding these increases include: 1) Are companies able to take pricing to offset this increase in costs? 2) What companies will benefit the most and be hurt the most by rising commodities ? 3) What impact will it have on consumer sales if companies pass through the cost increases? 4) What % of their total P & L is tied to commodities and can they offset the increases with savings and productivity in other places ?

Analysis:

CPG Food compnaies are facing the most difficult commodity inflation in the last 20+ years.Wheat,corn,oil and other basic ingredients are at multi-year highs.The two most likely culprits are ethanol and International demand.The key questions are will it continue and how will companies offset the rising costs without destroying their bottom line or destroying sales of their products.
 As an industry veteran in the baking and cereal segments pricing pressures is not new.However,the scope and size of the commodity increase particuliarly wheat is unprecedented.Companies have used hedging and price increases to try and minimize the impact to their P & L but these solutions can only go so far to cover some of the commodity inflation.

 To understand the impact to the companies earnings you need to understand the cost structure and other variables that make up a CPG companies P & L.Obviously,sales volume and the impact pricing increases have on volume is the largest and most relevant variable.But their are many other line items such as trade spending,fixed manufacturing costs,sales and distribution and consumer spending that also can influence both top line and bottom line.

 Companies in the cereal and baking segment are being hit the hardest.How they respond and utilize all components of their P & L will determine if this is a temporary hit to their bottom line or whether it will impact their profits for years to come.