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Kraft Is Affected by Higher Commodity Prices

August 17, 2011
By: Ed Clark, Top Producer Business and Issues Editor

Due to higher single digit increases in input costs, Kraft Foods—the world’s second largest food company—gained 2.2% in organic revenue in the first quarter 2011 in the U.S., driven by a 3.3% increase in pricing, but offset by a 1.1% decrease from lower volume.

Kraft has increased advertising and used other ways to blunt the increase in commodity price costs, but the company has had to pass along some portion of its higher costs to consumers, says Kraft spokesman John Simley.
In cheese, however, the company increased prices and showed a 1.7% increase in organic revenue from higher volume. “When it’s necessary to raise prices and they’re moving together (with higher volume) you’re really doing your job right.”
It’s questionable to what extent consumer food demand is impacted by price, however, according to USDA/ERS economist Richard Volpe. “If the price of food, on the whole, shoots up 10%, we consume between 0.5% and 1.5% less total food,” according to one department study, Volpe says.
Not only have the prices of many commodities been high, they also have been volatile. Have companies throughout the supply chain been more impacted by absolute price or volatility?
For Kraft, it’s more of price, as it has forward contracts in place to reduce the volatile ups and downs of commodity prices, Simley says.
Kraft’s core businesses are in beverage, cheese, snack foods, confectionary, and convenience foods.


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