Analysis - Will falling commodities mean lower grocery bills?

Mon Oct 17, 2011 3:20pm GMT

By Martinne Geller

(Reuters) - Grain prices are near their lowest in a year and global stockpiles are on the rise -- so meat, dairy and pasta prices are poised for a fall, right?

Not so fast. Food companies from Coca-Cola to General Mills Inc to Sara Lee Corp, which fought hard to push through price increases earlier this year, are unlikely to give them all back right away.

Beyond the practicalities that typically delay the pass-through impact of commodity costs through food producers, the fact is that companies are still in the process of recovering the profit margins they lost when prices spiked to record highs earlier this year.

And even with U.S. consumers fretting over recession, they tend to get used to higher prices over time, giving companies the confidence to maintain margin rather than grab for share.

PepsiCo Inc said last week that consumers did not cut back on its Frito-Lay products as much the company expected when it raised prices on a host of items this summer, and that it planned more increases in coming weeks.

"The reality is if you've taken price and you've made it stick ... it's not something you necessarily have to react to immediately," Ken Harris of Kantar Retail Americas Consulting said about the easing of commodity prices.

That means it will likely take months of lower commodity prices before most companies cut retail prices, if they do at all, which could provide some padding for corporate earnings.

"Prices go up like a rocket and drop like a feather,' said Sterling Smith, an analyst at Country Hedging in St. Paul, Minnesota. "Hedges will have to roll off and prices will need to show some signs of stability before companies will start to lower prices on the shelves."   Continued...

Trucks containing cases of Coca-Cola, which will be delivered to stores, sit outside a warehouse at the Swire Coca-Cola facility in Draper, Utah March 9, 2011.  REUTERS/George Frey
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