Vegetable oil inflation has been driving up food prices for 11 years

The Food and Agriculture Organization of the United Nations (FAO) Food price index average of 135.7 points in January, 1.1% more than in December and the highest level in 11 years. The latest increase was due to month-on-month increases in the FAO Vegetable Oil Price Index and the Dairy Price Index of 4.2% and 2.4%, respectively.

Palm oil is one of the components of the FAO Vegetable Oil Index, and its rise reflects fears that Indonesia, the world’s largest palm oil exporter, may reduce the volume of its exports. Palm oil is an ingredient in a wide range of food products, including ice cream and personal care products, such as detergents and beauty products. In January, in an effort to control inflation in its own country, Indonesia issued a mandate forcing the country’s producers to set aside 20% of palm oil shipments for domestic buyers. This mandate exacerbated the rise in palm oil prices caused by a typhoon that hit Malaysia. Malaysia and Indonesia are the main sources of palm oil in the world, accounting for around 85% of global production. For more details, see this mongabay article.

Malaysian Crude Palm Oil Futures, USD (February 22)
Source: Inc.

In its latest earnings call, consumer products giant Unilever cited palm oil as a key driver of its cost inflation, with palm oil prices up 130%, and as having a particular impact on its beauty and personal care segments. Interestingly, one of the reasons Unilever has given investors for its relatively low market share in Indonesia is that its competition, which is local to Indonesia, is vertically integrated, owning its own palm oil plantations.

Winsight Grocery Business goes down recent market share gains that nationally branded CPG companies have made against house brands. According to IRI and Boston Consulting Group, overall dollar sales of CPGs increased by 2.7% in 2021, on top of the extraordinary sales growth of 10.6% in 2020. CPG sales volume decreased by 2% last year, but increased by 4.3% over two years. Large CPG companies (sales greater than $6 billion) gained 0.2 percentage points in market share to 45.9%. IRI/BCG found that private label lost 0.4 percentage points of market share to 15.5% of CPG dollar sales.

The implication of meeting the above sales figures from IRI/BCG suggests that retail inflation for CPG items was around 4.7% in 2021, on average, which is consistent with the increases of “single-digit” pricing that many public GIC companies have reported. Meanwhile, most CPG companies have seen cost inflation over the past year that has exceeded this level, with some seeing high single-digit cost inflation and others seeing double-digit cost inflation. This led to a deterioration in gross margins that was modest for some CPG companies, such as branded food companies, and more severe for others, such as cleaning products companies. Most CPG companies are anticipating further rounds of price increases in the coming months to restore margins to pre-pandemic levels, but some expect it to take 12-18 months or more. , to fully restore margins to pre-pandemic levels.

food browser describe PepsiCo’s investments to mitigate its supply chain challenges. These investments include adding distribution centers, developing its last-mile delivery strategy, hiring 15,000 employees and launching a direct-to-consumer Frito-Lay location. In addition to the challenges that seemingly every CPG company has faced lately, Pepsi points to the rising cost of cooking oil as one of the main ingredients of cost pressure. Pepsi has been very successful during the pandemic as consumers bought more snacks, and those snacking habits, at least so far, have stuck.

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