High soft commodity prices mild threat to EMEA corporates - Fitch
Moscow - Bioenergy companies and protein producers will be the main losers among EMEA corporates from record soft commodity prices, Fitch Ratings said in a statement.
The statement said: "The impact on the food and beverage sector will be more muted because raw materials represent a smaller fraction of their costs, although subdued consumer demand and resistance from retailers to price inflation will compound the problem for this sector.
"The price rally has been driven by the US drought, primarily affecting production yields for corn and soybeans in North America. We believe the overall threat to corporates is mild, as weather-driven price shocks are often temporary - and prices could unwind on improved weather conditions. Tight supply of major grains and oilseeds associated with the drought is exacerbated by the high demand for food and protein from emerging economies, leading to tight stock-to-use ratios.
"Among the affected sectors, the downgrade of Abengoa to 'B+' from 'BB' last month was largely due to poor performance in its bioenergy business in Q112. We believe this segment will not see a meaningful recovery until mid-2013, as profitability depends on crush margins (the difference between the ethanol sales price and the input cost of corn). Bioenergy also has substitutes such as gas/oil that are not correlated to higher soft commodities; thus sustained high input costs for bioenergy make it less attractive relative to oil-based fuels.
"Protein producers will see the next biggest impact, as food retailers will be reluctant to accept substantially higher than CPI price inflation. CIS protein producers, such as MHP or Miratorg LLC, generally benefit from growing their own grain for fodder. Avangardco could see some pressure as it does not grow its own grain, and feed costs account for as much as 70% of the cost of producing eggs. However, it benefits from sourcing cheap grain from local farmers and adequate pricing power.
"While prices of substitutes often move in tandem, soybeans cannot be easily replaced as a key fodder component, due to the high protein relative to sunflower. Therefore, for animal feed producers such as Sodrugestvo, rising soybean prices could result in higher working-capital financing; this is mitigated by its equity private placement in early July 2012.
"For the food and beverage sectors, the impact is muted. Raw materials account for around 30% of the cost of goods sold for a food producer, and some input costs remain subdued, unlike in 2008 when all commodities were rising. Weak oil and metals prices will reduce the pressure on packaging costs. We do not expect higher food inflation for the rest of 2012, and do not foresee any extra pressure on profitability for EMEA-based packaged food producers in 2013.
"Small food manufacturers, or those focused on bakery and pasta with little bargaining power with retailers or product differentiation (eg Premier Foods, manufacturer of Hovis bread), will suffer more than global and diversified food companies such as Danone or Nestle.
"We published a report in May 2011 examining the potential impact of rising agricultural commodity prices, including a scenario in which a supply-driven price shock - such as drought - was combined with weak consumer spending power (see Related Research). We found the impact on retailers to be neutral as long as they are able to strengthen their private-label products, which would become more popular as consumers switch to cheaper alternatives. We expect this situation to remain through to 2013.
"Grain producers and exporters such as Mriya or Kernel in the CIS could be among the few beneficiaries of high demand and prices. However, we do not expect an immediate impact, as the harvest campaign is only finished for early crops. Ukraine and Russia are not expecting grain production yields as strong as 2011, as summer conditions are also hot and dry. Both countries may consider introducing export restrictions. Therefore, higher international prices could be partially offset by weaker domestic prices and export volumes."
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