Food processors advised to hedge their commodity bets

Food processors must consider sophisticated procurement strategies to overcome rising costs and scarce raw materials, a risk management consultancy firm has urged.

One of these strategies, said Peter Jackson, sales and marketing director at Aon, is hedging commodities to control spiralling costs.

"This is definitely gaining popularity amongst food manufacturers to protect themselves against the volatility of pricing - a long-term problem due to fundamental changes in demand from emerging markets and competition from biofuels."

US chocolate group Hershey was the latest international food manufacturing firm to announce a $10-12M commodity hedging strategy to firm up its costs in 2009. It estimated that it would see a $100M raw material increase in 2008, with market prices for ingredients such as cocoa, corn sweeteners, sugar and peanuts up by 20-45% since the start of the year.

Mars, Pepsico and Kellogg are among larger UK manufacturers that are understood to have hedged or be hedging commodities. Many more are expected to follow.

Paul Deakin, md of the UK's largest independent dairy ingredients business Meadow Foods, said: "We think it's quite likely that a commodities hedging market will develop for dairy products."

With the price of some ingredients now fluctuating as much in a single day as they did in a year in the early 1990s, food manufacturers needed to be more savvy about buying, said Deakin.

Jackson added: "We are seeing an emergence of a more sophisticated, multi-functional and strategic approach to procurement as global commodity prices soar. But it is not just the cost of commodities that is the problem. The biggest threat to manufacturers at the moment is raw material scarcity - and we are already seeing it biting."

Jackson said Aon's clients were currently struggling to source milk powder and polyethylene terephthalate (PET) for packaging. "Global demand for materials such as PET, aluminium, tin, glass is at an all time high - and it is a long-term issue."

The problem, he continued, was that most manufacturers were too "reactionary". They needed to start thinking about 'what if' action plans to secure essential commodities.