Agri-commodity prices add to the agony of Indian consumer foods companies – CRISIL

Heightened volatility in the prices of key agricultural commodities will add to the agony of consumer foods manufacturers in India this fiscal, an analysis by CRISIL Research shows.

Prices of several key commodities will increase this fiscal — those of wheat and maida by 7-8%, gram and gram flour by 6-8%, and milk and sugar by ~1% — while the prices of key oils will trend down on a high base, including palm and soy oil by 16-17% and sunflower oil by 10-12%.

Last fiscal, the prices of wheat had risen 10%, maida 7%, gram 5%, gram flour 6%, milk 11%, sugar 5%, and palm oil by 38%.

“Considering the price trends, pressure on raw material cost is expected to be higher for key maida and wheat procurers such as manufacturers of biscuits and ready-to-eat foods this fiscal. On the other hand, for snack manufacturers, which have a higher exposure to besan and edible oil, raw material prices would increase only marginally despite a 6-8% rise in besan prices because edible oil prices are expected to log a sharp fall. Key consumers of milk and sugar, such as the ice-cream and chocolate industries, would see a marginal increase in raw material cost,” said Pushan Sharma, Director at CRISIL Research.

To be sure, consumer foods companies have witnessed such volatility in commodity prices earlier, too.
For instance, the prices of wheat and sugar declined 14% and 2% in fiscal 2021 as the pandemic gripped the, but jumped 11% and 7%, respectively, in fiscal 2022 as the pandemic impact faded and demand from food processors picked up. Since February 2022, when the Russia-Ukraine conflict began, these commodities have rallied 19% and 6%, respectively, CRISIL said in a note.

Edible oil prices, on their part, spurted 35% in fiscal 2021 and a further 40% in fiscal 2022 due to the pandemic and lower supply from top oil-producing countries such as South America, Brazil, and Malaysia, and have climbed a further 40% since the onset of the war.

Structural increase, extreme volatility

A CRISIL Research analysis on prices of palm oil, gram, and wheat over the past 20 years indicates two major trends — a structural increase and extreme volatility.

The structural rise has led to an increased share of raw material cost in companies’ total revenue. Raw material cost, which accounted for 47% of the total revenue in fiscal 2001, shot up to 69% in fiscal 2021 for our sample set of 62 companies in edible oil, biscuits, snacks, chocolates and ready meal manufacturing.

These companies had revenue of ~ Rs 260 billion in fiscal 2021, accounting for 23-25% of the total industry revenue. As for volatility, the coefficient of variation for prices of palm oil, wheat, and Bengal gram increased to 8-13% in fiscal 2022 from 4-8% in fiscal 2002.

Two key reasons for increased volatility in agri-commodity prices are changing climatic conditions and increased geopolitical risk, the note added.

With about 50% of Indian agricultural land dependent on rainfall for irrigation, a fluctuation in rainfall affects yields to a great extent. An increase in the number of cyclones and heat waves is affecting agricultural productivity, too.

International trade in commodities such as edible oil and maize, on the other hand, has been impacted by
heightened geopolitical tensions.

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