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'Material' rise in sugar, dairy, wheat costs forces Premier Foods warning

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Shares in Premier Foods plunged after the owner of food brands such as Batchelors and Mr Kipling, squeezed by "material" rises in prices of the likes of palm oil, sugar and wheat, slashed its profits hopes.

Shares in the group – whose portfolio also includes Oxo stock cubes and Loyd Grossman sauces, and which makes Cadbury cakes under licence from Mondelez – tumbled by more than 16% at one point before recovering a little ground to stand at 40.68p in midday deals in London, a drop of 15.1% on the day.

The slide followed the group's caution that its trading profit for the year to the beginning of April was "expected to be 10% lower" than had been forecast, equivalent to a reduction of some £13m in the result to £118.3m on estimates from broker Shore Capital.

'Material inflation'

The warning reflected in part a dent to sales of Premier Foods' key brands from a change in promotional strategy by the company's key supermarket customers, who have cut multi-buy offers, so cutting demand volumes for these "category" products.

"Sales in our third quarter were weaker than expected despite a strong December," said Gavin Darby, the Premier Foods chief executive, adding that the group expected its "category performance to remain challenging" in early 2017 too.

This pressure is coming at a time when the group said it was "experiencing material inflation" in costs of many of its raw materials, "notably in commodities such as sugar, chocolate, dairy, wheat and palm oil".

Besides gains in values of many ags in global markets, with the Bcom agriculture index up 8% since Christmas, UK prices have received an extra boost from weakness in sterling following the vote in June to leave the European Union.

The pound stood at $1.2285 to £1 on Wednesday, down more than 17% since its level ahead of the Brexit vote, lifting the value in local terms of goods such as ags which are traded in dollars.

Ag price rises

Sterling's depreciation has been key, for instance, to the rally in UK wheat prices – defying the world trend – with London futures for March on Wednesday hitting £150.00 a tonne for the first time, on a nearest-but-one contract basis, since May 2014.

UK wheat values have also been supported by the dent to domestic supplies from a drop in UK production last year, and by demand termed "relatively buoyant" by traders at a major European commodities house.

"The latest animal feed usage data showed that 5.9% more wheat was used to produce animal feed in November than in the previous year," the traders said.

"Also forecast bioethanol demand is increasing with Ensus continuing to run and the Vivergo plant expected to be back on stream soon."

In oilseeds markets, Paris's euro-denominated rapeseed futures have, when translated into sterling terms hit their "highest level since early June 2013", topping £366 a tonne, according to analysis group CRM AgriCommodities.

Talks with supermarkets

The rises in costs of raw materials such as agricultural commodities has proved a headache to many UK food groups at a time when supermarkets are reluctant to pass on these rises to customers.

Some food manufacturers have responded through so-called "shrinkflation" to protect margins – cutting pack sizes while keeping prices constant, a tactic, for example, employed by Mondelez's Toblerone in widening the gaps between triangles in its chocolate bars.

Premier Foods said it was taking a "blended approach" towards managing raised raw material costs, "managing our own efficiencies", through measures including a £10m cost savings drive also unveiled on Wednesday, "adjusting promotional mechanics and formats where appropriate".

The group was "looking at limited price increases where these cannot be avoided".

Premier Foods said it was "working collaboratively with customers to agree these changes and are confident that appropriate settlements will be reached".

However, in another sign of the resistance that food manufacturers are finding from supermarket customers, it said that agreement was "taking longer than originally foreseen".

By Mike Verdin

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