December 7, 2007

Commodity costs to haunt US meat producers next year

Credit rating agency Fitch Ratings said that grain prices will likely continue to rise in 2008, bloating costs for food makers and decreasing profitability.

Some of the hardest hit will be US meat producers, who cannot easily hike their own prices to compensate.

While no one factor determines the price of agricultural commodities, Fitch expects that strong foreign grain exports and ethanol demand will cause feed grain prices to escalate.

Talk of a potential reduction in the current European banana tariff may provide relief for fresh produce companies, but their overall costs will continue to rise above 2006 levels as fuel and packaging costs remain high in the short term.

Fitch also said that elevated operating costs would pressure the profitability of Tyson Foods, Pilgrim's Pride and Hormel Foods in 2008. The companies produce poultry, beef and pork products.

Corn and soy, two of the primary ingredients in animal feed, have soared in prices over the past couple years due to booming foreign demand and climbing ethanol production. According to Fitch, the price of corn is up 80 percent since the start of 2006 while the price of soy is up 40 percent.