TOP CONTRIBUTORS

Adam Farren

In the past half-century, the food and beverage industry has blossomed from a collection of mom-and-pop operations to a trillion-dollar powerhouse led by huge international corporations. Familiar names like Coca-Cola, Starbucks and McDonald's can be found in every corner of the globe. The overarching theme dominating the food and beverage industry is exploding global demand and rapidly rising food prices. The breakneck economic growth of countries such as China, India, Brazil and Vietnam gives billions of people the ability indulge in ways previously enjoyed only by those in developed nations. A massive influx of consumers onto the global food market has resulted in a rapid and sustained increase in food prices, stoking global inflation.

The related shift to ethanol and other bio-diesels in the face of rapidly rising energy prices has only exacerbated the world's food inflation headache. Although some members of the food and beverage industry (primarily farmers and agribusinesses) benefit from higher prices, most corporations in the industry have seen their cost of doing business increase, biting into profit margins. These higher costs are passed, in part, onto consumers, who find their discretionary spending restricted when they must spend a larger chunk of their paycheck at restaurants and grocery stores. So, just as oil prices are a key economic indicator, so too are the prices of key agricultural commodities such as corn, wheat, and soybeans.

Subsets of the Food and Beverage Industry

Farming

The farming subset of the food and beverage industry encompasses those businesses involved in the production and collection of raw agricultural commodities such as corn, wheat, soybeans and rice. This portion of the food and beverage industry includes seed producers such as Monsanto and Dupont as well as agribusinesses such as ADM and closely held Cargill:

Farm Products:

• Monsanto Company (MON)
• DuPont (DD)
• Syngenta AG (SYT)

Agribusiness:

• Archer-Daniels-Midland Company (ADM)
• Bunge (BG)
• Corn Products International (CPO)
• Smithfield Foods (SFD)
• Tyson Foods (TSN)

Processing

This portion of the food and beverage industry is dedicated to processing raw material foods into forms that may be more easily distributed and sold to consumers. Processed foods come in many different forms but may be roughly divided into the following subsets:

Food- Major Diversified:

• Kraft Foods (KFT)
• ConAgra Foods (CAG)
• Sara Lee (SLE)
• H.J. Heinz Company (HNZ)
• Frito-Lay (PEP)
• General Mills (GIS)
• Kellogg Company (K)
• Campbell Soup Company (CPB)

Beverages- Alcoholic & Non-Alcoholic:

• Coca-Cola Company (KO)
• Pepsico (PEP)
• Anheuser-Busch Companies (BUD)
• Molson Coors Brewing Company (TAP)
• Cadbury Schweppes (CSG)

Confectioners:

• Hershey Foods (HSY)
• Cadbury Schweppes (CSG)

Distribution

The companies engaged in the distribution subset of the food and beverage industry are responsible for putting finished or near-finished food products into the hands of hungry consumers. Most broadly, there are two channels through which corporations deliver processed foods to their customers. On one hand, grocers and supermarkets provide processed but unprepared food to customers that they may then prepare in their homes. On the other hand, the restaurant industry serves its customers with fully prepared foods.

Grocers:

• Kroger Company (KR)
• Safeway (SWY)
• SuperValu (SVU)
• Whole Foods Market (WFMI)

Quick Service Restaurants:

• McDonald's (MCD)
• Yum! Brands (YUM)
• Burger King Holdings (BKC)
• Wendy's International (WEN)

Casual & Upscale Restaurants

• Starbucks (SBUX)
• Darden Restaurants (DRI)
• Cheesecake Factory (CAKE)
• Brinker International (EAT)

Trends & Forces

Food Inflation

% increase in prices of wheat, corn, soya and rice from 2005-2007^[1]

Over the past decade the world has witnessed a drastic rise in food prices. According to the World Bank, over the past three years alone, global food prices have increased over 80%^[2] These dramatic increases can be attributed to the convergence of factors that has created the perfect storm for food prices. Prime among these factors is a world that is growing both more populous and prosperous. New wealth in rapidly developing nations such as China, India, Brazil and Vietnam is allowing billions of people to increase their caloric intake, increasing global demand and straining supplies. Similarly in response to a more prosperous and populous world, global energy prices have skyrocketed, increasing input prices for food production. High energy prices, in turn, have triggered a shift toward ethanol and biodiesels which further increases the demand for crops such as corn and soybeans. Finally, an increase in crop shortages caused by "freak" weather occurrences such as a 10 year drought in Australia and floods in south Asian as well as pest outbreaks.

Rising Global Demand & Engel's Law

Rising global demand is the driving force behind higher food prices. More people in developing countries are earning more money, lifting their standards of living. Of course, the first step to a better standard of living is a better diet. This trend was first codified by Ernst Engel, a 19th-century German economist, as Engel's law in the 19th century. Engel's law says that as incomes increase, people spend a smaller percentage of their incomes on food — but they also switch from cheaper to more expensive food. In other words the law calls for an aggregate increase in food consumption as well as a substitution of lower quality foods with higher quality ones. Between 1990 and 2003, daily caloric consumption per person increased from 2318 to 2773 in India and from 2709 to 2940 in China.^[3] Though it may not seem like much on its face, even a small average increase among a population of 2.5 billion people represents a large increase in overall demand. Furthermore, a greater proportion of these calories are coming from animal products like beef, chicken and pork. Although it may seem counter-intuitive at first, the move to meats puts further upward pressure on agricultural prices because it takes about eight times as much corn to produce the same number of calories from meat as from bread.^[4]

The Rising Cost of Carbon Energy

Another important factor driving the increase in food prices has been the rapid and sustained increase in fossil fuel prices since the early 2000's. Higher energy prices lead to higher food prices in two ways. First, fossil fuels such as oil and natural gas are critical components of fertilizers used to grow crops. For example, the price of diammonium phosphate, a common fertilizer, is about $1,200 a ton in the U.S., up from about $450 a ton a year ago.^[5] Additionally, fossil fuels provide most of the energy needed for mechanized food production and transport.

Ethanol & Biodiesels

One of the chief causes of food-price inflation is new demand for ethanol and biodiesel, which can be made from corn, palm oil, sugar and other crops. Skyrocketing carbon energy prices have made the production of these biofuels much more economically attractive. Because of this, farmers have diverted food once meant for human consumption for toward the production of biofuels such as ethanol. This trend is particularly pronounced in the American heartland where the U.S. government has enacted several subsidies for the production of corn based ethanol to ease its dependency on foreign oil producers. The rise of biofuels packs a one-two punch for food prices. First, foods diverted for biofuel product represent an additional source of demand. Second, because producing biofuels may increase other food prices indirectly as farmers reduce acreage dedicated to crops like wheat, rice and other staples in favor for agricultural biofuel products.