Just How Bad Is Food Inflation?

How bad is food inflation? Okay, I have obsessed a little about this today, but only because global headlines have been very stark in the past couple days (see my earlier posts).

The Fed Beige Book spent an unusual amount of time discussing inflation. They noted that it has been hard for U.S. manufacturers to pass through higher prices to consumers (they were discussing this in connection with retailers and manufacturers as well).

This is true, but the Fed also noted that manufacturers are planning more attempts to hike prices this year. Also, it is not preventing food price hikes all over the world. (See also: Corn, Soybeans Soar as USDA Stokes Supply Worries)

So how much pressure are food companies under? Bank of America Merrill Lynch put out an informative note today addressing this:

"We estimate that the average packaged food company is facing input cost inflation of 6-7% on an un-hedged basis in CY11 due largely to increases in grains, oils, coffee, sugar, and packaging. While hedging could bring the realized inflation down to ~ 5-6%, we believe the net effect is that companies will need net price realization of ~2% and productivity of ~3% to protect margins in CY11."

Price gains of 2 percent, productivity gains of 3 percent.

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