Relief in sight for rising commodity, fuel costs?

By

Lindsey Partos, SeafoodSource contributing editor, reporting from Paris

Published on
May 8, 2011

From feed to fuel and packaging to transportation, rising input costs continue to bite at margins for global seafood business all along the supply chain.

Bad weather, fatter wallets in emerging markets, political unrest in key oil regions, biofuels and market speculation are some of the factors feeding into the spiraling cost of business today.

According to data from the United Nations, food costs jumped 25 percent in 2010, with corn rising more than 85 percent, wheat up 82.9 percent and sugar up more than 124 percent.

For the first time since the 1960s, yields of the world’s most important crops, wheat and rice, are rising more slowly than the global population. This is exacerbated by the UN warning that food production will have to rise by 70 percent by 2050 in developed countries to keep pace with a global population growth expected to hit 9 billion.

Compounding the pull on food commodities is the rise in price for energy. While pundits mull over the impact of Osama bin Laden’s surprising death on oil prices, the market continues to rally. U.S. website Politico.com reported that despite crude oil futures immediately falling in Asia on the news, prices soon rose nearly 50 cents, to USD 114.36 last Monday.

Costs for the key ingredients in fish feed, which are closely linked to global commodity and energy prices, have increased as much as 50 percent in recent years, according to the United Nations’ Food and Agriculture Organization (FAO). Fish feed represents 50 to 70 percent of fish farmers’ production costs, and the average price of the ingredients commonly used in fish feed jumped between 20 and 92 percent from June 2007 to June 2008, said the FAO in a recent report.

But earlier this month the FAO reported that for the first time in eight months, the Food Price Index had dropped, after months of continuous price rises.

According to the FAO the index, a measure of the monthly change in international prices of a basket of food commodities and the average of five commodity group price indices, averaged 230 points in March, down 2.9 percent from its peak in February, but still 37 percent above March of last year.?Despite the decrease, David Hallam, director of FAO’s Trade and market division, warned, “It would be premature to conclude that this is a reversal of the upward trend.” He signaled that low stock levels, the implications for oil prices of events in the Middle East and North Africa and the effects of the destruction in Japan “all make for continuing uncertainty and price volatility over the coming months.”

On the radar of the seafood industry for years, risk management tools are arguably now more essential than ever for today’s businesses. Hedging, for example, has been headlining for some time as a steady way to protect against short-term price volatility. Essentially, businesses can buy into forward contracts on the futures markets to hedge against price rises of key food inputs in the future. This can provide greater visibility in the short term for a firm’s essential food ingredient costs.

Buying key commodities directly from farmers can also shield a firm from volatility on the markets by ensuring a constant supply for key ingredients. A recent article in The Economist, for example, highlights how the world’s biggest food firm Nestle, which is weathering well today’s tougher climate, is in long-term direct relationships with farmers. Designing smaller packages for the same price may also come into the solution mix to beat food price inflation, or through the reformulation and re-engineering of products.

But, weather permitting, an ease in key supplies could be on the horizon as supplies in the market adjust to demand. As Alberto Weisser, boss of agri-giant Bunge, said in the recent The Economist piece: “Next year prices will come down. Farmers have so many incentives to plant more.”

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