The food manufacturing industry is being hit for six. Premier Foods had a torrid week - its share price plummeted 9% last Friday to 109p, prompting the City to question its financial strength as the price of raw material, including wheat, hit record highs.

Even after reassuring the market that it wouldn't be issuing shares to raise cash and was in no danger of defaulting on bank loans, speculation continued. If Premier Foods cuts its dividend next month as feared, it won't be the only one forced to take desperate measures, experts warn.

The pressures are mounting. Factory-gate inflation soared to a 16-year high this week - UK manufacturing output price inflation reached 5.7% in January, while input price inflation hit 19%.

Suppliers are looking to their retail partners for relief, which is unlikely to be forthcoming. Tesco, Asda, Sainsbury's and Morrisons are embroiled in a price war, eager to provide the cheapest weekly shop to consumers hit by rising energy and mortgage costs. As we reported last week, they're not exactly amenable to supplier requests for higher payments.

Indeed, Asda chief executive Andy Bond summed up the retailers' stance when he warned suppliers to "do their own restructuring" to stop price increases being passed on.

Some suppliers are just sitting tight, believing the squeeze is temporary. Asked about the supermarkets' refusal to accept higher prices, the CEO of one major UK supplier, says: "It is a negotiation stance. The stance won't last."

He's kidding himself, says Tim Kershaw, MD of food supply chain consultancy Libra Europe. The manufacturers have ignored the bigger picture, he says.

"There are profit warnings in the pipeline because companies have no more margin left to absorb," says Kershaw. "Commodity-driven companies with no export market are in trouble. This is not another six-month price war created by the supermarkets. Food costs are being driven by the Chinese import market. Suppliers should have kept an eye on the global economy."

Dairy and meat producers have been able to get price rises through because of the rising global market for their products, he says. "But the likes of Premier hasn't got that bargaining tool. It can't sell ready meals and chilled goods to China like dairy producers can."

Manufacturers have to streamline operations and cut costs, says Kershaw, but even then there will be casualties. "Cost control must become sparser in what is an inefficient industry. Those with no ability to pay higher prices will go to the wall."

It is not that the manufacturers didn't see it coming. CEO Robert Schofield was quoted last year as saying "food inflation is here to stay". And a spokesman for the company says scheduled closures of seven factories in 2008 and six warehouses are evidence Premier has begun rationalisation.

But the timing of Premier Foods' £1.6bn acquisition of Rank Hovis McDougall suggests the food industry wasn't as prepared as the spokesman suggests. The deal was announced on 4 December 2006 and completed in March 2007.

At the time Premier Foods planned to launch a range of cereals and other products under the Hovis brand, which is now causing so much angst. "Schofield probably didn't anticipate wheat prices doubling in one year," admits the Premier Foods spokesman, "but that doesn't mean the RHM deal was the wrong acquisition."

The road ahead for Premier and other manufacturers reliant on commodities such as wheat could be rocky. Shareholders are unlikely to be convinced of the benefits of cutting dividends. Offloading troublesome commodity-based brands isn't going to be easy, either. The only way forward, according to Kershaw, is clever cost-cutting, which could take two years for large companies to achieve.

Meanwhile, companies with large portfolios must get price rises through on any products possible, says Investec analyst Martin Deboo. "Companies owning heavily branded but infrequently purchased products, such as Premier's Branston Pickle, must sneak a few pence here and there on to those products."

If there is one bright spot for Premier Foods it is the strength of its brands, says Deboo. "Rival brands and own label will be as expensive if they use the same ingredients. Retailers will find it hard to delist the strong brands that drive sales."

Smaller manufacturers with lesser-known brands may not be so lucky.the perfect storm

£1.2bn

The sum paid by Premier Foods to acquire RHM and with it, Hovis, in March 2007

96%

The rise in international wheat prices this quarter compared with a year ago according to Morgan Stanley

66%

The decline in the share price of Premier Foods since February 2007

18.9%

The annual input price inflation in UK manufacturing - a record high

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