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Smucker Punched
Agricultural economics force price hikes
The Plain Dealer
August 18, 2007
By Frank Bentayou
Just as a new school year approaches, J.M. Smucker Co. said Friday that many of its lovable convenience foods, including the popular Uncrustables kid lunches, are poised to cost more in the coming months.
As with many other foods these days, the relatively low price of the thaw-and-nibble food with fillings of cheese or peanut butter and jelly or honey is destined to head higher. And the reason is almost too big and complex to imagine.
In fact, it`s "a confluence of global and domestic circumstances," according to a U.S. Department of Agriculture analyst, that makes dramatic inflation practically inevitable at the grocery store.
That`s what Shayle Shagam, the government analyst, said when asked about the cost of milk.
His Washington colleague, analyst Keith Menzie, ticked off some of these circumstances: drought in Australia and the western United States, lower crop yield in Canada, shifting government agriculture policies in the European Union, greater demand in China, Russia and elsewhere in Asia.
Menzie also mentioned the frenzy to make ethanol out of corn and biodiesel out of soybean oil. Putting megatons of farm products into energy production means diminishing supplies that can go on the dining room table.
"It`s Economics 101," Shagam said in a phone interview. The price goes up when a commodity becomes scarce. That`s happening with a wide range of farm products.
The net result is that we almost certainly will pay more for food in the months ahead.
Price increases for agricultural products have already begun, starting two years ago with milk and wheat. Smucker`s understands that well because it buys a lot more agricultural products than any family.
The 110-year-old company, known for fruit jellies, jams, Jif peanut butter, Crisco oil and Pillsbury products, announced its first-quarter 2008 financial results Friday.
Tim Smucker, chairman and co-chief executive officer, pointed to the company`s best-ever three months for sales - $561.5 million, a 6.6 percent increase from the same period a year ago - and to its robust net income, up 42 percent from 2007`s first quarter.
But in a written statement, he also said the company is "operating in a difficult cost environment" and noted "significant raw-material increases last year and this." The raw materials whose cost Smucker`s is watching go through the roof are milk, soybeans, soybean oil, wheat and peanuts.
Here`s what the Agriculture Department analysts said about these products:
Dry or powdered milk was 83 cents a pound in the April-June quarter of 2006. In that same period of 2007, the price had jumped to $1.67, a more than 100 percent increase.
Soybeans have slipped in acreage as farmers exploit the higher prices corn brings now that the government aggressively supports its conversion into ethanol. From late summer 2005 to a year later, soybean prices went up 13 percent. In the past year, they increased 21 percent more.
Soybean oil spiked from 21 cents a pound from summer 2005 to 31 cents a pound the following summer. Menzie attributes a lot of the rise to the buzz about biodiesel.
The price of a bushel of wheat closed Friday at $6.51, Norton said. A year ago on the same date the price was $4.72; the year before it was $3.84. That makes its two-year rise 69 percent.
Peanuts in the shell rose 14 percent over two years, Menzie said, "still a significant price increase."
No wonder Smucker`s had to raise Crisco`s price three times in the past 12 months, 5 percent to 6 percent each time.
When pressed about how much of a price increase is ahead for its products affected by raw materials, Mark Belgya, Smucker`s chief financial officer, begs off: "We are still evaluating that." But he did say price increases have "historically ranged from about 4 to 6 percent - per price increase."
Good news for J.M. Smucker shareholders included an increase in income per diluted share from 50 cents in the first quarter last year to 71 cents this year. In addition, shares, traded on the New York Stock Exchange, rose almost 2 percent Friday to close at $56.68. To read full article, click here. © The Plain Dealer
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