Thursday, May 30, 2013

June is Dairy Month…Read about Trending in Profit Margins

What a better way to say goodbye to the chilly, wet spring that most of the country experienced than by jumping into June—Dairy Month—with some great research on profit margins.

As Americans become increasingly concerned about the negative health effects of certain foods or food ingredients, manufacturers are introducing a greater variety of healthier products. This includes lower-sugar flavored milks and reduced-fat cultured products.

This move has expanded profit margins throughout the food industry because health-conscious consumers are generally willing to pay more for food that they believe is healthy for them. (Think Greek yogurt.) In particular, large companies that have been providing Americans with foods for years have established brand loyalty, so when they introduce healthier, more-expensive products, they typically do not experience significant declines in demand for their products because people view them as high-quality brands, according to a recent report from IBISWorld Inc. As such, these companies can realize higher profit margins than companies that do not have well-established brands.

According to the report, food processors must purchase a variety of commodities, such as feed, corn, milk, wheat and sugar, to produce their goods. The prices of these commodities help determine how processors in a variety of food industries price their goods. So when the price of a commodity fluctuates rapidly from year to year, the cost of manufacturing products becomes volatile. (The dairy industry knows this very well.)

Volatility, in turn, leaves processors less able to anticipate cost increases. They will often pass these costs on to consumers in the form of higher product prices, or, as in the case of ice cream, by reducing package size. Although this move does not bode well for consumers, many will still pay the higher prices, or accept the smaller package, especially for foods that are staples in their diets. Processors end up benefiting because the higher input prices aren’t eating into their profit margins, while demand from consumers stays steady.

And here’s some good news on commodity prices. They are expected to be less volatile during the next five years, which presents even more opportunity for processors to expand their profit margins, according to IBISWorld. Most notable is the price of corn, which is an input in all 10 of the most profitable food industries identified by IBISWorld, one of which is ice cream. (See table.)

During the five years to 2018, the price of corn is anticipated to decline at an annualized rate of 2.6% to $5.71 per bushel, reversing its 6.7% annualized ascent from the past five years. Consequently, processors will be able to increase the volume of products they manufacture and price them more favorably for consumers.

Declines in the price of corn will also make the price of feed less volatile during the next five years since corn is a primary input into feed for livestock.

And the price of sugar is also an important commodity in several of the most profitable food-producing industries, including ice cream. It, too, is expected to be less volatile during the next five years compared to the past five.

The top-10 most profitable food industries have a risk rating ranging from low to medium-high in 2013, with an average weighted overall risk score of 4.57 out of 9 (with 9 representing the highest risk). The primary drivers affecting risk in these industries include demand from supermarkets and grocery stores and the price of commodities. Because consumers’ incomes are improving, they will be more likely to purchase goods from supermarkets and grocery stores, including discretionary goods, which is driving demand for food manufacturers.

Food processors aim to strike a balance between providing Americans with the food that they love at a reasonable price and maximizing company profitability. During the next five years, profit margins in these already-profitable food product industries are expected to expand as commodity prices become less volatile and operators cut costs associated with production. In addition, if prices do rise, they will be better able to pass off cost increases in the form of higher product prices to consumers because disposable incomes are improving in line with the economy. In particular, larger and well-established companies produce brands that millions of Americans are familiar with and loyal to. Still, Americans will look to their favorite brands to introduce healthier food products as they strive to live healthier lives. Processors that introduce and advertise healthier products are likely to be rewarded with greater sales, thus benefiting margins further.

Thanks to IBISWorld Inc., for sharing this report. For a printable PDF of the report, click HERE.

With that said, June is the perfect month to remind consumers that dairy foods are inherently healthy. Milk and other dairy foods provide nine essential nutrients.

1. Calcium: Helps build and maintain healthy bones and teeth.

2. Potassium: Helps to regulate the body’s fluid balance and maintain normal blood pressure, and it’s needed for muscle activity.

3. Phosphorus: Helps strengthen bones and generate energy in the body’s cells.

4. Protein: The protein in milk, yogurt and cheese builds and repairs muscle tissue, and serves as a source of energy and satiety.

5. Vitamin D: Promotes the absorption of calcium and enhances bone strength.

6. Vitamin A: Helps maintain normal vision and skin, and is important for bone growth.

7. Vitamin B-12: Helps maintain healthy red blood cells and nerve cells.

8. Riboflavin: Helps convert food into energy that the body can use and it’s important for normal eyesight and healthy skin.

9. Niacin: Helps bodies digest carbohydrates and fatty acids.

Further, according to the Midwest Dairy Council, Dairy Month is a perfect time to celebrate dairy farmers’ commitment to healthy people, healthy communities and a healthy planet! One of the greatest challenges of the next generation will be providing nutritious, affordable food to a global population expected to grow to nine billion by 2050 – while using fewer resources. Dairy is part of the solution. Not only are dairy products rich in nutrients, they are also being produced using fewer resources, helping to foster healthy people, healthy communities and a healthy planet.

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