Fitch: U.S. Commodity Food 2012 Outlook Stable Due to Structural Changes and Near-Term Cost Relief
Fitch Ratings' 2012 outlook for the commodity protein, produce and dairy sectors is stable for 2012. Structural changes aimed at increasing operating efficiency and managing through cost volatility are expected to continue.
Even though the cost of key inputs, such as corn and fluid raw milk, for animal feed and dairy products, respectively have declined, they remain elevated versus historical averages. Furthermore, Europe's deteriorating macroeconomic conditions and changing rules around bananas trade and tariffs are also a concern.
Fitch's outlook for the commodity food industry could be revised if global economic weakness reduces export demand or if there are widespread declines in operating cash flow. Changes in financial strategy that result in an increase in debt-financed acquisitions or share repurchases would result in negative rating actions.
"We believe certain commodities are continuing the process of establishing new higher norms," said Carla Norfleet Taylor, Director, Fitch Ratings.
"Restructuring operations and maintaining lower debt levels will help low-margin commodity food firms limit credit risk when there are periodic swings in operating earnings and cash flow."
On an individual sector basis, protein segment fundamentals should remain strong as meat prices will likely be supported by tight supply. Fitch expects chicken and beef,total red meat and poultry production to decline, mainly due to chicken and beef, while export demand from Asia should remain strong for all products. Declining egg sets and low cattle herds support expectations of lower industry production in 2012.
Fresh produce firms receive a significant portion of their revenue and earnings from Europe, making them most exposed to macroeconomic challenges in the region. High bunker fuel prices and currency fluctuations are also likely to be challenges for fresh produce companies.
In the dairy segment, processing margins in fluid milk should stabilize in 2012 due to moderately lower raw milk prices and cost reductions. However, weak volume trends could limit wholesale pricing power and reinforce the need to reduce cost and capacity.
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