Rising cost of transportation pulling up food inflation in the U.S.

For consumers who have enjoyed low to negative food inflation over the years, the jump in food prices is likely to be a shocker.

In the push for cost cut led higher margins, U.S. trucking companies and railroad operators are forcing some of their biggest customers, including Hormel Foods Corp and General Mills Inc to spend more on deliveries and raise their own prices as a means of passing on their cost burdens to their clients.

Interviews with executives at ten companies across the consumer goods, food and commodities sectors reveal that companies across this spectrum are grappling with ways to defend their profit margins with transportation costs rising by nearly double the inflation rate.

In recent weeks, the prices of cereals, snacks and chickens have climbed up with inflation emerging as the most distinct threat. Case in point, the U.S. Department of Labor reported earlier this month that consumer prices have registered their biggest jump in more than a year.

With the speeding up of the U.S. economy, trucking fleets and railroads have tried to match the pace by capacity expansion, much to the delight of Wall Street.

Shares of Norfolk Southern, CSX Corp, and Union Pacific Corp have risen by an average of 22% in the last 1 year, as they lengthened trains, cut headcount, rail cars and locomotives to lower expenses and boost margins.

B&G Foods Inc, makers of Cream of Wheat, Tyson Foods Inc, owner of Hillshire Farms brand and Jimmy Dean sausage, Cheerios maker General Mills have all said they will be passing on the higher freight costs to their customers.

According to Tom Hayes, CEO of Tyson, its price increases ”should be in place for the second half”; it has now already begun negotiating price increases with food service operators and retailers.

Although Tyson food declined to quantify the increase in freight costs in recent months, a spokesman for the company stated, the industry saw a price rise between 10% to 15%.

General Mills has also informed food service customers and convenience store of a rise in prices, with its CEO, Jeff Harmening, saying logistic costs and wage inflation are its factors.

”It feels to me like an environment that should be beneficial for some pricing,” said Harmening, in a presentation at last week’s Consumer Analyst Group of New York conference.

Jim Snee, the Chief Executive of Hormel Foods, the maker of Skippy peanut butter and SPAM, also said he has been talking with retailers about raising prices.

“We don’t believe we’re going to recoup all of our freight cost increases for the balance of the year,” said Snee in an interview while noting that the firm’s operating margin has sunk to 13.2% from 15.6% due to higher costs, including freight, in its most recent quarter.

Late last month, Mondelez International Inc, the maker of Cadburry chocolates, halted operations at its Toledo, Ohio wheat flour mill, the second-largest flour mill in the United States, because the plant could not get sufficient number of rail cars to carry its flour to bakeries, said its spokeswoman.

She declined to comment on whether Mondelez would raise prices to cover any higher costs.

New government regulation for drivers as well as the availibility of trucks are pushing up freight costs.

“We anticipate inflationary pressures likely to cause upward price movements in a variety of categories,” said Mark Belgya, Chief Financial Officer of JM Smucker Co at an analyst conference last week.

As per an estimate by the U.S. Department of Agriculture, transportation costs are just a sliver of the price consumers pay at the grocery store and represent just 3.3 cents of every dollar consumers spend.

However, according to Alexia Howard, an analyst at Bernstein, the increase in truck rates over the last 12 months, implies a 15-to-18 basis point gross margin headwind for U.S. food companies on average.

“A lot of the consumer goods companies work on margin,” said Joe Glauber, a former USDA Chief Economist and a senior research fellow at the International Food Policy Research Institute. “They are going to be pushing those costs along” to retailers.

Ultimately “consumers end up shouldering more of the burden,” said Glauber.

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