The size and scope of Nestle means that, when it talks, the industry should stop and listen.
Last week, Nestle held its annual investor meeting at its HQ in the Swiss town of Vevey and the world’s largest food maker had some forthright comments to make on one of the issues taxing minds throughout the food industry – commodity costs.
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Nestle head of procurement Kevin Petrie told the meeting that Nestle was facing “unprecedented rises” in the price of commodities. “We see tremendous volatility and headwinds,” he said.
Some of the smaller businesses among you will be too concerned with the pressure raw-material costs are having on your own bottom line to lose too much sleep over Nestle’s commodity bill but, when the company spends CHF22bn (US$26.3bn) a year on ingredients and CHF8bn on packaging, it is clear that the Kit Kat maker, for all its strength, will also be looking at the current situation with furrowed brows.
And, worryingly, Petrie warned the volatility would continue for over a decade. The world is currently in the grip of its fifth historical commodity boom cycle, Petrie said. The current boom began in 2004 and could continue until 2024, he predicted.
The comments on commodities concerned some analysts, with the outlook for raw materials a factor (alongside anxiety over the impact the strength the Swiss franc could have on Nestle’s results) in some cutting their earnings forecasts, lowering their price target on Nestle’s stock or reducing their rating on the company’s shares.
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By GlobalDataHowever, while Nestle is not immune to the industry-wide concern over commodities, some industry watchers believe the company is better positioned than some of its peers to handle the situation. MF Global analyst Andy Smith, for one, said Nestle “is in a much better position” to manage the pressure “much more effectively” than Danone or Unilever.
And meanwhile, at the meeting, Nestle CEO Paul Bulcke outlined a benefit of higher commodity prices – renewed investment in the agriculture sector, which, he claimed, would mean production levels would rise in the long run. Bulcke said Nestle would spend more on sustainable farming, which, of course, has the benefit of strengthening its corporate responsibility credentials as well as improving yields.
Of course, this column would not be complete without the latest on the story affecting farmers throughout Europe – the E. coli outbreak, which, at the latest count, has killed 35 people and sickened over 3,200. Germany’s Robert Koch Institute has said there has been a decline in new infections but could not be sure if that was due to the source of the infection or changes in consumption.
In another twist to a story that has confused consumers and angered farmers across Europe, the Institute said on Friday that bean sprouts from a farm in the German state of Lower Saxony could in fact be behind the outbreak. This time last week, a possible link emerged between bean sprouts and the outbreak, although by Monday afternoon, initial tests had cast doubt on the claim. The uncertainty only served to compound criticism of health officials in Germany, who had first suggested that the outbreak was due to cucumbers imported from Spain.
However, by Friday, the Institute revealed that those who had eaten the sprouts were nine times more likely to have fallen ill than those who did not. Its latest study also revealed that all of those who had fallen ill had eaten the sprouts.
The Institute, Germany’s Federal Office of Consumer Protection and Food Safety and the country’s Federal Institute for Risk Assessment also said a warning not to eat cucumbers, tomatoes and lettuce in northern Germany no longer needed to be in force. “According to the current state of knowledge, products from the agricultural business in Lower Saxony are the most likely source of the infections,” a statement read. There does, however, remain uncertainty over how the E. coli entered the food chain.
The outbreak caused a fall in produce prices in many European states and a slump in consumer confidence in the safety in a swathe of produce items. Farmers have demanded compensation from the EU and a marketing campaign across member states to restore confidence in the sector. The European Commission has made two offers of compensation, the first of which was rejected by EU member states. Neither offer has won over EU farmers union Copa-Cogeca but EU agricultural ministers are set to discuss the second, improved rescue package tomorrow.
