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As raw commodity prices accelerate, food companies likely to reprice products - Daily News Egypt

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As raw commodity prices accelerate, food companies likely to reprice products

Milk powder prices hover around 5-years high, sugar rises 7.5% in 2 months


Most Egyptian food companies, which are reporting a big drop in sales volume during 2017 after they hiked their product prices in the wake of the currency flotation, seem to be under new pressure due to a jump in raw commodity prices in global markets.

With sugar and milk powder prices hovering around a multi-year high, companies operating in the Egyptian market could raise their product prices again to avoid reporting losses on an expected jump in input material prices.

But new hikes in their product prices could only mean more drops in their sales volumes and net profits.

The worst is still to come, with new governmental austerity measures underway and an anticipated rise in fuel prices, which add more pressures on these companies to raise their product prices.

Raw material commodity prices have been badly affected in 2017, with a jump in demand against a big drop in supply due to climates problems.

A survey by Daily News Egypt of some food companies working in the Egyptian market showed that most of them care about their market share, even if they may be obliged to accept lower profit margins.

When Egypt floated its currency seven months ago, local companies started raising their product prices gradually, with some companies doubling their prices at the moment.

Milk powder prices weigh on 

With some local companies depending on importing whole milk powder to use in their products in case of a shortage in local supply, a jump in commodity prices in the global market means more pressure on their input costs.

Since the beginning of 2017, whole milk powder prices have inched up about 45% according to data provided by the Global Dairy Trade, a platform that supplies data about the commodity.

The whole milk powder increased by 12.5% in June from the previous month to $3,395 per tonne. Some 22,004 tonnes of the product were sold, up from 21,236 tonnes the previous month, according to data compiled by Global Dairy Trade.

“The market conditions are getting stronger for the milk powder, and there is a growing demand from emerging markets,” AgriHQ Dairy analyst Susan Kilsby told Daily News Egypt.

Emerging markets are among the top consumers of the milk powder around the globe, according to the UN’s Food and Agriculture Organization (FAO).

“Lack of supply in return is casting its shadow over the market. I think prices could continue their rally in the few coming months until the beginning of Autumn; then, milk output from New Zealand is expected to recover this season,” she added.

For Danone Company, a rise in the milk powder prices could hurt the company pricing policy, which may badly affect its market share.

“A jump in milk powder prices could affect our profit margin in the last three months of the year. That also means that we will pay more hard currency to import the powder,” John Mayers, the company spokesperson for Africa and the Middle East, added.

Prices have soared since the authorities in November floated the exchange rate of the Egyptian pound as part of drastic reforms to obtain a $12 billion loan from the International Monetary Fund (IMF).

The value of the pound has since plummeted, with one dollar—then worth EGP 8.8 at the official exchange rate—now worth more than EGP 18.

Sugar prices are on the rise too

Despite the current downtrend for sugar prices, they are gaining momentum again in the last two months, with commodity prices soaring 7.5% in two weeks.

In the international market, prices of raw sugar and white sugar have both risen in the last couple of months, with white sugar on the Intercontinental Exchange up 6.8%, while raw sugar futures rose 7.5%.

“There is a big drop in supply at the current time, which led to a recovery in the white commodity prices,” Reina Augustu, a senior commodities analyst at Agridata, told Daily News Egypt.

She also noted that growing demand from African and Middle Eastern countries is offsetting a low demand in Europe and America.

Sugar output is expected to be less than consumption in 2017-18, according to a research note by Südzucker Group.

“There could be a slight increase in closing stocks, which explains the recent gain in sugar prices. Europe will also see the end of sugar quotas from the beginning of August, which could cause prices to continue the rally,” according to the note.

“Sugar consumption in 2017-18 may rise by 10.4%. This is double the average growth seen in the past decade. There is an excessive consumption of sugar in developing markets. This can explain why prices are rising,” it added.

But even with sugar prices ticking up, any change in pricing policy is critical for Edita.

“We couldn’t raise prices even with sugar prices rising again. At the current moment, all we have to do is keep our market share safe,” a senior official at Edita told Daily News Egypt.

Hero Food Industries’ managing director, Mohamed Bazan, told Daily News Egypt that their pricing policy could hardly change, even with an uptick in sugar prices.

“Volumes of our sales were affected, but the value is on the rise. The volume drop is due to a big drop in customer’s purchasing power in the wake of the flotation,” he explained.

Hero had lifted the price of jam by 30% and that of baby food between 17% and 43%.

Austerity measures another weigh

Among the top reasons that could affect the pricing policy of food companies is the expected governmental austerity measures, such as cutting subsidies and lifting fuel prices.

The Egyptian government is expected to enact a second round of economic reforms at the beginning of fiscal year (FY) 2017/2018.

The country’s inflation rate fell to 29.7% in May from 31.5% in April, the first decline since the currency was devalued seven months ago.

“If there is any increase in the cost of production, I think food companies will put the cost on the consumer as usual,” Ramy Orabi, a senior economist in Pharos told Daily News Egypt.

Dubai-based Arqaam Capital expects prices to soar again in the coming months because of fiscal reforms and seasonal factors, including the holy month of Ramadan, when consumption rates increase significantly, and electricity consumption during the summer rises.

HSBC said in a research note that with Ramadan usually adding to food price pressures, the downward trajectory could reverse in the near term, particularly if the government delivers on the next round of subsidy cuts and VAT increases in July (the start of the new fiscal year).

HSBC also noted that while the headline rate of price growth will remain well above the Central Bank of Egypt’s (CBE) 9% target in 2018, it expects to see signs that inflation has stabilised.

“The high fiscal cost of rate increases and strong foreign appetite for Egyptian debt at current yields also argue against further monetary tightening,” it added.

Meanwhile a research note issued by Capital Economics London also expected prices to resume their rally starting next July.

“Data provide the first hard evidence that the inflationary effects of the 50% drop in the Egyptian pound against the dollar since November have started to fade. And the more timely survey evidence suggests that price pressures have continued to ease—for example, the price components of the PMI have admittedly dropped sharply,” the London-based consultancy explained.

“There may be another temporary jump in inflation if the government pushes ahead with subsidy cuts, as well as plans to raise the rate of the VAT from 13% to 14%,” it added.

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https://dailynewsegypt.com/2017/06/15/raw-commodity-prices-accelerate-food-companies-likely-reprice-products/
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