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Higher Commodity Prices Squeeze Heinz Profits

H.J. Heinz's lower second-quarter outlook, which caused its shares to fall on Tuesday, is an example of how higher commodity prices are hurting food companies, one analyst said.

Consumer staple Heinz's shares fell more than 3 percent after it released its second-quarter forecast, noting that higher commodity costs and slow sales would put pressure on profits in markets such as the U.S.

Although the company's U.S. consumers are increasingly cash-strapped, Heinz has raised prices by 3.1 percent for its North American consumers.

"Heinz is striking that balance," said Jonathan Feeney, senior analyst at Janney Montgomery Scott. "As you can see, they think this is the best way to proceed. They're trading off a little bit of volume for some pricing, and we'll see a year from now if it made sense."

Heinz's disappointing outlook comes as some food companies are choosing to rollback price increases to attract customers with lighter wallets. Both Kraft Foods and J. M. Smucker have recently cut prices.

Feeney added that companies need to become more creative with package sizing to continue to get the price realization they need.

"For the most part, commodity prices are up, and companies really are going to generally choose to price versus holding onto volume," he said. "So it's going to be about getting creative with that low-end consumer because, yes, I think a line has been reached."

WATCH:In a recent interview, Feeney weighed in on General Mills and Campbell Soup, which were trading near 52-week highs.

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Disclosures:

Janney Montgomery Scott has an interest in H.J. Heinz.

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