World: Beer and soft drinks expected to be particularly affected by El Nino weather pattern

Another inflation threat is looming (literally) on the horizon according to analysts at Barclays with an upcoming El Nino weather pattern set to hike prices across a range of commodities, the Proactive Investors reported on June 22.

Beer and soft drinks in particular will be affected, added the bank.

“The impact of El Niño on beverages is likely to increase the price of domestically sourced wheat and barley used in beer production and sugar in soft drinks.

With increasing food prices, consumers could feel the pinch financially, said the bank, especially those with lower incomes and therefore less able to absorb inflationary shocks.

“We see beer and soft drinks as more susceptible to these concerns. Spirits consumption skews towards the wealthy, who are likely more able to absorb these shocks.

“However, they are not immune as especially the lower-end of the spirits price ladder has a much more mainstream consumer base.

“From a company perspective, we see the highest inflation pressure across beverages to be for AB InBev, Britvic, and Heineken.”

El Nino (and La Nina) are weather events that see the temperature of the sea in the Pacific rise in the case of El Nino or drop for La Nina.

Traditionally, El Nino has brought drought, higher winter temperatures and winds.

Barclays said the impact of El Niño on agricultural production in Asia and Latin America this time might exacerbate food-security concerns for the global economy.

“Previous El Niño events have shown the production of rice, sugar and palm oil have been negatively affected in Asia, while production of soybeans can improve in Latin America.”

“The net impact of these moving parts in food production may ultimately still prove to be inflationary on balance, but the shock can be felt with long and varied lags, heavily influenced by other latent factors, such as economic cycles and energy costs.”

Historically, the UN FAO Food Price Index typically rises around 16 months after an El Niño event, said Barclays, and is generally associated with upward pressure on food inflation for most countries.

Food staples most affected in the past have been cocoa, coffee, rice, and sugar, and while potentially ahead of the El Niño impact, all four have been trending higher in recent months.

Working through the possible outcomes on particular food and drinks companies, Barclays sees the highest incremental inflation pressure for Lindt, JDE Peet’s, ABF, and Nestle.

The prospect of higher inflation from El Nino favours ingredient companies with either high gross margins (for example Chr Hansen, Novozymes) or dynamic pass-through pricing models (for example Kerry) where pass-through is more prescriptive than value-based/annual pricing negotiations.

Given the current situation and impact on purchasing power of consumers, especially lower and middle-income consumers in emerging markets, which will see wallets shrink further with higher food prices.

Unilever and Reckitt as especially exposed to lower-income emerging market consumers, said Barclays.

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