Saturday, January 17, 2009

Outlook: Pet food prices 2009

Just coming out of a year facing some of the toughest economic times since the Great Depression and having experienced numerous price increases in our pet food during 2008, one question on all our minds is: What is going to happen this year? Just a couple days ago I found that Debbie Phillip Donaldson attempted a close look at the crystal ball in her attempt to provide a forecast for the Pet Food Industry and ultimately explain what the signs mean for us as pet owners
“From the beginning of November 2007 to the beginning of December 2008, the price of a bushel of corn spiked and then plummeted dramatically from US$7.38 at its peak in July to US$3.79 as of December 22. Though businesses usually rely on financial data and expert analysis to predict how their costs might change, pet food professionals in charge of tracking raw material prices could be forgiven for wanting a magical device to help them see into the future. At this point a year ago, signs were starting to point to a rapid rise in the price of commodity ingredients common to pet food. Last summer saw a frightening spike, followed almost as quickly by a deep dive this past fall. For example, the price of a bushel of corn—at about US$4 exactly a year ago—zoomed to a high of US$7.38 in early July 2008, according to the Jacobsen Publishing Co. By October it had fallen to below US$5, then all the way down to US$3.79 at the time of this writing. The fluctuation in prices is no surprise considering the current global economy. And not all commodity prices are declining; for example, poultry ingredient prices are still trending higher due to demand issues and uncertainty with key suppliers. The volatility is enough to keep any purchasing manager—not to mention supplier—guessing. "It reminds me of skiing," says Gregg Griffin, sales manager of American Dehydrated Foods Inc. (ADF). "We're used to skiing on green slopes, and now we've come to a black slope and have no choice but to go down the black."
Besides the overall economy, Griffin and others tie commodity prices directly to energy costs, particularly the oil and natural gas that fuel several key cogs in the food and feed supply chain. Griffin cites examples such as transportation—shipping raw materials and finished products around the world by road, train, air and sea—and plant operations—keeping machines running to produce those materials and products. For instance, Griffin says ADF is a "huge consumer of natural gas to operate our spray dryers."
Graphs and charts showing energy prices over the past year follow similar lines and curves as the ones for corn and other commodities. Case in point: Light crude oil, from which gasoline is made, closed at just over US$42 a barrel at press time—more than US$100 less per barrel than its peak in mid-July 2008.
Some people believe that if you take an even longer view, the link between energy and commodity prices can provide significant clues for the future. "When you chart the prices of grain and oil since 1970, you can clearly see that price spikes for both are aligned," said Giovanni Gasperoni, executive VP of sales and marketing for Novus International Inc., in the July/August issue of Feed International.
Joel Newman, president and CEO of the American Feed Industry Association (AFIA), agrees fuel prices have a definite impact on commodity prices, but he gives other reasons for the dramatic pricing changes over the past few years. "Because of the current global economy, demand has declined," he says. Before the recession, global demand for food and feed ingredients had increased significantly.
Newman also cites financial speculation in crude oil and commodities, particularly the proliferation of speculative index funds. In 2000, regulations were changed to allow exemptions of such index funds, leading to aggressive investment and soaring prices.
"Prior to those changes, the market allowed users to effectively hedge their positions, off-set by speculative positions, and the market converged as contracts moved to termination dates," Newman explains. In other words, prices moved in conjunction with normal supply and demand.
One of AFIA's key activities, he says, is working with the US House of Representatives Committee on Agriculture to remove those exemptions. "We're also working to have all commodity trades regulated by the Commodity Futures Trading Commission," he adds. Currently that commission, created by Congress in 1974 as an independent agency to regulate commodity futures and option markets in the US, does not have authority for over-the-counter and foreign exchange trades.
No one is comfortable predicting specific commodity price changes this year, but it's a safe bet to watch energy. Currently the US government and most economists are expecting oil prices to stabilize and possibly increase slightly from their low levels at the end of 2008. The annual average price is now projected to be US$51 per barrel in 2009, says the Energy Information Administration (EIA), in charge of energy statistics for the US government. "The condition of the global economy and production decisions by the Organization of Petroleum Exporting Countries are expected to remain the crucial factors driving world oil prices," says EIA. Falling demand now may create supply problems later.
Newman agrees we will probably not see the huge spikes of 2008 in oil or grain prices, but grain will likely not drop all the way back down to its previous low, which was US$2 to $2.50 for a bushel of corn. He suggests another factor impacting commodity prices will be planting costs, which include seed, fertilizer, fuel for field work and transportation. "Currently planting costs are estimated to be about 25% more per acre than a year ago, which will require a higher floor level of pricing," he says.
A key indicator to watch is the global stocks-to-use grain ratios: The amount of inventory at the end of the year relative to what is normally used annually. The ratio had dipped precariously in recent years and is still too low, Newman says, which tends to drive prices up. "It will take more than one good harvest year to improve global inventory levels."
The fact that the 2008 US corn harvest ended up being the second highest ever will help, too, at least with that grain, according to the November issue of Feed Management.
While crystal balls may be in short supply, these clues may help you track pricing for key pet food ingredients.”
So much for Debbie’s forecast. What does all of this mean in plain English? What am I going to pay? Let me give you my forecast. I don’t use a crystal ball, I use common sense. We know that most manufacturers increased their prices at least twice last year. Add to this the fact that despite those increases pet food sales have increased as well, I would suggest that pet food manufacturers are feeling very confident right now. Even if some of the increases in sales are due to increased pricing, there was definitely an increase in volume as well. According to the PetFood Industry, Infoscan Reviews Information Resources Inc claims that in the period from June 15 to November 30, 2008 cat and dog food sales (in US$ and volume) in supermarkets, drugstores and mass merchandise outlets (except Wal-Mart) increased overall and in most categories. During this period total dog food sales (in those merchandise outlets were up 11.6% in value (from $250 to $280 Million Dollars) with a volume increase from 283 to 298 Million lbs or 4.5%. Cat food jumped from $170 to 192 Million Dollars or from 126 to 137 Million lbs (9.2%). The largest increase was noticed in the segment of dry food, followed by biscuits & treats, then semi moist and finally canned food.
Then there is finally the long expected change happening starting this coming Tuesday with the presidential inauguration, or shall I say at least we hope so. Let’s assume that there indeed will be a positive change, which will be reflected in a recovering economy (even if it is a slow recovery). Combine all this with the manufacturer’s confidence and I would say let’s get ready to pay around 20% more for pet food by the end of this New Year. We just recovered from the sticker shock that lower priced premium pet food had hit the $50 mark for a 30 lbs bag. I’d say for the same bag we are going to dish out $60 at the end of the year. Happy New Year, I guess the holidays are over and reality kicks back in.

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