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Easing inflation numbers good news for food companies

Easing inflation numbers good news for food companies

Last week, the Food and Agriculture Organization (FAO) released its December and full-year food price indices. The December numbers were encouraging in a week that ended on a gloomy note, after the credit downgrade of several European nations. In December, the FAO Food Price Index fell by 5.3% year-on-year to 211 points, its lowest during 2011, and continued the downtrend seen since February, when it peaked.

The fall in global food price indices has positive implications for Indian consumer companies, assuming the trend is sustained. Stable food prices globally should have a calming effect on domestic prices as well, as they anchor price expectations to an extent. Though there are stiff restrictions on trade in the above mentioned food products, except for vegetable oils, domestic prices tend to take a cue from the international prices.

Locally, food inflation has been trending down, too. This is positive for consumer sentiment and spending. The sharp rise in food prices would have eroded disposable incomes and consumer companies would have been reporting some impact on demand. If inflation eases, spending power should improve and so should demand. Food companies such as Nestlé India Ltd and Britannia Industries Ltd, and food businesses of companies such as Hindustan Unilever Ltd and ITC Ltd, will also benefit from stable or falling input costs.

In 2011-12, companies have trimmed advertising and promotional spends as rising costs and the inability to pass all of these to customers was affecting operating profit margins. They will be in a position to drive demand through stable product prices, promotions and advertising as a decline in costs will make more funds available. As things stand, 2012-13 appears to promise a better time for food companies. Food prices could, of course, reverse this trend as has been seen in the past, which remains a key risk.

We welcome your comments at marktomarket@livemint.com

Also See | Positive implications (PDF)

Inflation at two-year low (PDF)

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