Global food prices decline, but will Indian companies benefit?

Could the tide of rising prices be turning for Indian packaged food companies? The Food and Agriculture Organization’s (FAO’s) Food Price Index fell by 4.3% in May over the previous month, on the heels of a 1.4% decline in April. All the constituents of the gauge—indices of meat, dairy, cereals, oils and sugar—fell in May. Some of the declines, such as in dairy products, will not be reflected fully in India since the country does not allow free trade in them.

A decline in vegetable oil is a key positive on multiple fronts. While a consumer’s budget benefits, makers of refined edible oils, too, find procurement costs going lower, and companies using them as an input will find their production costs falling.

Soya oil prices have fallen due to better-than-expected planting in the US and weaker grain prices, said FAO, while palm oil prices fell due to a temporary improvement in production and falling crude oil prices. The linkage with crude is related to its use as a biofuel.

FAO has also forecast world cereal production to touch a record 2.4 billion tonnes in 2012, up by 3.2% over last year, mainly due to a 7.3% increase in the output of coarse grains and a 2.2% rise in rice, but wheat output is forecast to drop by 2.9%. Wheat prices have been relatively stable in India for the past few years and food firms will hope they stay that way.

Apart from trade restrictions, another factor that may hamper the transmission of falling global prices is a strong dollar. India is a large importer of vegetable oils, and a stronger rupee will allow domestic buyers to benefit from falling prices. Yet another issue, how good the south-west monsoon is, will also be a key factor determining crop prices. Data for the season’s start is not encouraging—1-20 June has seen rainfall 26% below its long-term average—and one can only hope that it picks up speed in the rest of the season.

The current trend in global food prices is encouraging, both from the consumer’s and the packaged food industry’s points of view. But food prices have been volatile, and about six months ago, too, global prices had dipped only to increase after a few months.

It is, thus, worth waiting for a few more months to see if this trend is sustainable. If food prices remain low, and begin to reflect in domestic wholesale prices, firms such as Nestlé India Ltd and Hindustan Unilever Ltd will see their processed foods businesses benefit from lower input costs.

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PDF by Sarvesh Sharma/Mint