Analysis - Prices and savings shield food groups from milk surge

Price increases in emerging markets and cost-cutting will help Europe's biggest food groups avoid a profit hit similar to that of the last milk crisis of 2007 when their dairy costs soared.

Swiss Nestle and Paris-based Danone are more exposed to milk costs than to other commodities, and prices have been rising this year due to strong emerging market demand and lower production in Europe and North America.

Nestle is the world's biggest milk buyer for its products such as Nido milk powder, Coffee-Mate and Cailler chocolate, while Danone has nearly two-thirds of its sales in dairy products such as Activia yoghurt and Actimel drinks.
There are also some fears that rising grain prices due largely to drought and an export ban in Russia will add to the pressure on milk prices as European farmers feed more grains to dairy cattle during the colder winter months. But analysts say the rise in milk prices is showing sign of cooling and the highest prices this year were well below 2007's peaks, even if it pays to keep a careful eye on Danone as milk accounts for more of its input costs than in the case of rivals.

"In terms of size Nestle has most exposure to milk. However, given the concentration of its portfolio Danone will be impacted most from higher milk prices," said analyst Jon Cox at Kepler Capital Markets in Zurich. Danone has recognised the rise in milk prices by raising its forecast of milk cost inflation in July to 10 percent for 2010 from 5-7 percent previously, but has also added that prices had peaked in the early summer and were now trending down. Analysts say milk accounts for 38 percent of Danone's raw material costs, 23 percent at Nestle and 6 percent at Unilever Plc/NV, and buying forward is quite difficult for liquid milk and companies often buy directly from farmers.

This means liquid milk prices can be more volatile than the more widely traded skimmed milk powder, and here Danone is the most exposed as the need for fresh milk is greater at the French yoghurt group, while Nestle is able to buy half of its requirement as milk powder for its milk drinks and chocolates.

Nestle, the world's biggest food group, spent 5 billion Swiss francs on milk in 2009.
"Dairy is one of the areas where we are seeing an escalation in costs and therefore it's one of the areas where you are likely to see some pricing action," Nestle finance director Jim Singh told an investor roadshow this month.
European Union milk powder prices peaked at around $5,500 (3,529 pounds) a tonne in 2007 falling to around $1,700 in early 2009 before edging back to just below $3,000 currently, and analysts say milk powder does give a pointer to future liquid prices.

"On the whole, milk prices have become much more volatile over the last two years which is due to the fact that the European Union intervenes less on milk prices," said Dieter Mirbach, manager of industry group European Dairy Farmers.
NOT SUCH A BIG ASK Danone raised its prices following the 2007 milk price surge, only to cut them in the middle of 2009 when costs fell, so analysts say investors are right to be wary when Danone starts raising prices in such a volatile market.

Analyst Alex Molloy at Credit Suisse said 40 percent of Danone's dairy sales are in emerging markets where general inflation runs at around 5 percent and so pushing up price is not such a big ask. Analyst Pablo Zuanic at Liberum Capital said United States liquid milk prices are starting to come down and West European prices are also peaking, and an LTO Nederland survey of European milk prices for July due on Sept 3 may confirm this.

The survey showed average European milk prices in June were up 23 percent year-on-year at 30.26 euros per 100 litres to reach an 18-month high. However, if prices have peaked then Zuanic says a Danone price rise of just 2 percent in Western Europe in the second half of 2010 will be needed.

"We continue to argue the price increase "needed" by Danone in Western Europe for the second half is quite manageable," he said. Pressure on Danone may intensify if grain prices continue to rise with Orianne Segaud at Natixis saying, "If wheat prices continue to rise, Danone has the least protection as it is the most exposed to liquid milk prices with no hedging mechanism." But New Zealand, the world's largest milk exporter largely through butter and milk powder trade, produces its milk from grass-fed livestock without any cereal-based supplement so any grain price rise will not affect production costs.

Barry Callebaut, the world's largest chocolate maker which counts Nestle and Hershey among its clients, is one of the top three users of milk powder in Europe but has been relatively insulated from price rises as it uses no fresh liquid milk in its chocolate production. Anglo-Dutch Unilever's main milk usage is at its world leading Cornetto, Magnum and Ben & Jerry's ice cream operation but it is a smaller milk buyer compared to Nestle and Danone.
Source: Reuters


E-book price war "absurd"

The e-book pricing war sparked by the launch of Amazon’s UK Kindle e-book store, which has seen the retailer price some bestselling books at less than £3, has been branded "absolutely absurd" by a top publisher.

Concerns have been raised that the UK market could be set for a battle over the headline price of e-books similar to that waged in the US over the past year. However, other publishers claimed the low prices would not affect the future pricing model of e-books.

Amazon.co.uk launched its Kindle e-book store two weeks ago, promising to offer the lowest prices on the market. In response, W H Smith dropped the price of its top 100 fiction e-books to a third of their original level, and then said that it would sell all e-books at a 50% discount.

Amazon has consistently priced some of the bestselling titles in the market at less than £3, leading to publishers and rival retailers accusing it of selling the titles as loss leaders. Stieg Larsson’s Millennium trilogy is among those available at less than £3. Iain Miller, marketing and digital publishing manager at Larsson’s publisher Quercus, declined to comment on Amazon’s pricing tactics.

However, another senior publisher attacked the pricing strategies of W H Smith and Amazon. He said: "It’s absolutely absurd to devalue our product but I’m not surprised because our industry is populated by nincompoops." He said Amazon’s move could make the agency model less attractive to publishers. He said: "In this instance, on the wholesale model, publishers are fine because it is retailers taking the pain. If we say a book is £10 and you get 40% discount, we get £6. If the retailer chooses to sell it for £2, we’re still all right."

A review of e-book prices undertaken by The Bookseller shows that Amazon and WHS are offering the lowest prices. Kindle and WHS e-books are also significantly cheaper than their counterparts on Apple’s iBookstore, where prices are set by the publisher.

Before the Sony Reader launch in 2008, publishers argued that the value of e-books needed to be at parity with the print edition. Some publishers contacted this week claimed Amazon’s move would not lead to expectations of low e-books prices. One said: "It’s a minuscule market and early doors for e-books in the UK. There’s no way the stable door has closed in terms of the size of the business in 10 years’ time."


Verizon Trying to Leverage iPad and Testing New Pricing Strategies

On Wednesday, Verizon demonstrated the power of the app, announcing plans to make it generally available by next year. If this happens, the carrier’s FiOS TV service will be available on the iPad, making the TV experience as mobile as the tablet device from Apple.

According to a Daily Tech piece highlighted that the biggest obstacle for Verizon right now is getting content providers on board. Verizon doesn’t plan to offer the app until it has a powerful portfolio of content providers agreeing to the benefits of its service.

Once the new service is in place, Verizon subscribers will be able to rent or buy movies and content through the company’s website or a set-top box. They can also download and watch the content on as many as five PCs and/or mobile devices such as the Droid X, Droid 2, BlackBerry Stor, and Windows Mobile 6.5 devices. While we wait out the news on the iPad app, Verizon has announced a carrier test of a $99 unlimited everything plan. The plan is designed to directly compete with Sprint’s Simply Everything plan, also priced at $99 per month.

According to a Verizon spokesperson, the limited-time promotion will be available only on single lines. Once tiered data plans are rolled out, don’t expect the unlimited aspect of the deal to stick around.

Regardless of the outcome, the fact that Verizon is testing options means that it is experimenting with some changes to its pricing strategies. The company has often been branded as the “luxury mobile provider” compared to players like T-Mobile, which offers an unlimited everything plan on its no-contract Even More Plus for $79.99 per month.Verizon also appears worried about competition from discount carriers like MetroPCS, Cricket and Boost as the company is testing a $50 unlimited prepaid plan in the Southeast.

In other Verizon news, the company is making headway in cloud computing for credit card transactions. Verizon Computing as a Service, or CaaS, the company's cloud computing solution delivered from Verizon cloud centers in the U.S. and Europe, is the first cloud-based solution to successfully complete the Payment Card Industry Data Security Standard audit for storing, processing and transmitting credit card information.

Source: TMCnet.com