Negative Outlook for Industry in 2009

ELLIOT ZWIEBACH

NEW YORK — The 2009 outlook for the food industry, particularly the packaged goods segment, is negative, Moody's Investors Service here said yesterday. The reason for the negative view, according to Brian Weddington, vice president and senior analyst for the ratings service, is commodity prices, “[which] are posed to further surpass historical averages, squeezing profit margins and putting cash flow at risk for most companies." There are some positive signs, however, he pointed out. "Although commodity prices are likely to rise next year, the costs of some key ingredients — including corn, wheat and soybeans — have retreated recently, and they could moderate further as farmers prepare to increase output to meet strong demand." There could also be price relief from a softening global economy, which could weaken global demand for some commodities, Weddington explained. For their part, retailers are more receptive to passing through price hikes from suppliers, and consumers have become more conditioned to paying those higher prices, he said. "While most investment-grade food companies should be able to sustain fairly stable earnings next year under moderate commodity inflation, most other companies will have a tough time passing on rising costs, and all are likely to see profit margins contract," he said. "If commodity prices rise more sharply than expected, however, some weaker packaged foods companies that lack sufficient pricing power with customers could come under significant pressure," Weddington added.

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