As suppliers globally are hit by rocketing commodity inflation, which sectors are being hardest hit and will retail hikes result?

The smallest US maize yields since 1995. Global inventories of maize and soybean at historical lows. Rapidly soaring prices for maize, wheat and soybeans. The drought that engulfed the grain-producing states of the US Midwest this summer has wreaked havoc in the commodities markets and left food producers facing dramatically increased production costs.

The problems with drought in the US have been compounded by weather issues in other regions, from drought in South America early in the year to concerns about production in the Black Sea region and inclement weather in much of Europe. As a result, the big recovery in global grain supplies expected for the 2012/13 failed to materialise.

With food price inflation back at the top of the political agenda, the grains markets are being blamed for price hikes in a whole host of food categories. But what grocery items are actually most at risk?

An obvious starting point is to look at products that use flour in manufacturing. Although the US drought has had a more direct impact on maize and soybean, wheat has soared in parallel through its connection to maize and soybeans via feeds and biofuel, and as a result of reduced output in the former Soviet Union and Europe. UK milling wheat has gone up from £188/tonne to £245/tonne since early June and is up 25.45% year-on-year [Mintec].

“Poultry products are likely to see the most immediate increase in price because the production cycle is so much quicker than in other sectors”

Mike Ader, EFFP

As a rule of thumb, every £10 on the commodity wheat price adds about 0.8p to the cost of producing a loaf of bread, says Investec analyst Martin Deboo. That means a loaf is currently 4.56p more expensive to produce than in June.

Already, retail prices have been moving up: over the past three months, the average price of a 800g loaf of Hovis medium soft white has moved from an average of £1.18 across the big four to £1.25, with an 800g loaf of Kingsmill Great Everyday White Medium up from £1.18 to £1.30 [].

If bread is the number one product vulnerable to grains-related inflation, cereals and biscuits are not far behind. According to Mintec analyst Mark Kozlowski, the wheat content in biscuits is very similar to bread, but the impact of wheat increases tends to be less than in bread because biscuit makers typically use a cheaper grade of wheat and can supplement with other grains not affected as much by price increases.

Cakes, pastas, pizzas and pies as well as bread-coated products complete the list of “high-risk” flour-based products.

Hidden grain
Also highly susceptible to grains inflation are products that use a lot of grain in their production process. This is where the livestock sector comes in - according to the NFU, feed accounts for 60% of on-farm production costs for poultry and 52% for pork, placing both poultry and pork firmly on the list of “at risk” products.

“Poultry products are likely to see the most immediate increase because the production cycle is so much quicker than in other livestock sectors,” says EFFP partner Mike Ader.

Dairy is somewhat less exposed (feed accounts for 28% of production costs) but consumers are likely to feel some impact. This is unlikely to be in milk - the price of which is kept low because of intense competition between retailers - but higher dairy commodity prices could mean price hikes for yoghurt as well as dairy-based confectionery.

“The drought is already having an impact on US milk production, with US farmers struggling to pay for grain-based cattle feed,” says Euromonitor analyst Francisco Redruello. “They are opting in many cases to liquidate part of their herds and this is having an impact on categories like semi-skimmed powder milk. Milk powder formats are used in the manufacturing of yoghurt and some chocolate confectionery, and these products will be inevitably affected by higher costs.”

Some soft drinks could also prove vulnerable. High fructose maize syrup is rarely used to sweeten drinks in the UK, but a number of soft drinks - especially energy drinks - contain glucose, often produced from maize starch.

In alcoholic drinks, grain-based spirits such as vodka are deemed to be at most risk, with opinions split on the likely impact on beer. “Obviously the prices of Big Brewing are going to be affected by the US drought and they are going to be in a scramble for resources,” believes Jon Whittle, off-trade sales director at Budweiser Budvar UK. But a spokesman for the British Beer & Pub Association points to a strong UK barley harvest and says “we believe there is little to be concerned about”.

As for how much more consumers are likely to pay for the 10 “at risk” items on our list in coming months, the jury is still out. Ader stresses “most major food businesses in the UK will have mechanisms in place to mitigate the effects of these grain price rises, whether pre-arranged contracts with farmers or hedging strategies”.

Redruello believes overall retail price hikes are unlikely to exceed 5%. “Looking back at 2008, when agricultural commodities reached an all-time high, most of the impact of the input cost rises was absorbed by manufacturers,” he says. The same is likely to happen this time around, he adds, unless high grains prices are exacerbated by an escalation in oil prices and a collapse in the value of the Euro because of the deepening debt crisis.

“In a perfect storm, it wouldn’t be possible for manufacturers to absorb everything and the rise in prices would need to be passed on - very significantly - to the final consumer.”

Bread: The first product everyone looks to whenever wheat prices go up. Retail prices rises tend to be more muted than the commodity movements but prices have already moved up at retail.

Cereals: The clue is in the name. Over the past year, 24 Weetabix have gone from £1.98 in the big four to £2.17, while 16 Shredded Wheat biscuits cost £1.92, up from £1.52 [].

Biscuits: Over the past year, biscuit wheat in the UK has gone up by nearly 30% to £216.9/tonne [Mintec]. Plainer biscuits, such as digestives, will be especially vulnerable.

Poultry & eggs: Feed accounts for a massive 60% of production costs. With the cost of bread coating also up, breaded products - such as kievs - are facing a double whammy.

Pork: Pork producers have for some time been raising the alarm over higher grains prices, and warned last week that increased feed costs could lead to a global pork shortage.

Dairy: Products such as yoghurts - which use globally traded commodities such as skimmed milk powder - could prove vulnerable as could dairy-based confectionery items.

Vegetable oils: Soybeans have been strongly affected by the drought. Other oils, such as palm and sunflower oil, often follow suit, making this a category to watch for future rises.

Clothes: Cotton prices have been falling recently and high maize and soybean prices could encourage farmers to switch planting areas away from cotton, thus limiting supplies.

Beer & spirits: The UK barley harvest is said to be strong, reducing the exposure of brewers. Grain-based spirits such as vodka are an obvious “at risk” item whenever the markets move.

Soft drinks: Glucose prices are tipped to rise in response to higher maize prices, making some soft drinks categories - especially energy drinks - susceptible to price hikes.