Special edition: Food prices

Diving dollar makes US less resistant

By Clarisse Douaud

- Last updated on GMT

Related tags: United states dollar, Us

The falling dollar is likely to cause a shift in strategy for US
food manufacturers as they feel both the pinch and the benefit -
depending on how global their operations are and from where they
source ingredients.

The dollar has only dropped value more precipitously since the US Federal Reserve sliced rates from 5.25 to 4.75 in September following a ripple effect felt around the world of widespread US mortgage defaults. In addition, the country from which the US gets the bulk of its imports overall, Canada, is experiencing a ground-breaking high of its own dollar in relation to that of its US counterpart. For the first time in 31 years, the Canadian dollar reached parity with, and surpassed, the US dollar. All this comes at a time when food prices around the world are on the rise as manufacturers face higher packaging and energy bills on the back of high oil prices. Food manufacturers have also been experiencing a surge in commodity prices, aggravated by both supply shortfalls and increased global demand. However, it seems few of the major food companies want to divulge their strategies or concerns on this matter, if they have any. Among the companies who declined to provide comment for this article are: Frito-Lay, ConAgra, Sara Lee, Heinz and Kellogg. Other companies have not yet responded to our requests. Based on financial reports from some of the major food players, key potential impacts of a weakening US dollar can be inferred. Firstly, manufacturers can expect increased expenses for any operations, sourcing or contracts in which they engage in with an overseas country having a higher valued currency. Sara Lee, for one, reported a $77m increase in general and administrative expenses for Q3 2007 over the comparable period in the previous year. It attributed this in part to the strengthening of foreign currencies versus the US dollar as well as higher advertising, promotion and distribution costs. Secondly, for global companies, the negative impact of a weak US dollar can be offset by gains made when selling US goods abroad. Kraft Foods reported an increase of $110m in net revenue for the quarter ending June 2007, and a $17m increase in operating income. The food giant indicated that currency movements bolstered revenues primarily due to the continuing weakness of the US dollar against the euro. The dollar reached an all-time low against the euro last week, before improving slightly by Friday against major currencies thanks to an encouraging US jobs report. The Campbell Soup Company reported sales increases for the quarter ending January 2007, based on the favourable impact of currency and growth in its businesses in Germany and France. Thirdly, US sourcing of raw materials from Canada is likely to take a hit if the dollar parity continues. On the flipside however, is that it may also be more attractive for US food manufacturers exporting Northbound. Sara Lee's Foodservice division reported its net sales increased by $1m due to changes in foreign currency, in particular that of the Canadian dollar. Campbell Soup also reported a sales increase in Canada fuelled by growth in ready-to-serve-soups, aseptically-packaged broth, as well as the favourable impact of currency. Canada could be particularly affected given the state of the balance-of-trade between the two nations. Between January and July of this year, the US had already imported $180b in goods from Canada - according to the Federal Trade Division - while exporting $141b to the country.

Related topics: Suppliers

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