Wednesday, May 31, 2006


DATE: My 31, 2006

Internationally, packers are complaining about the “perfect storm” affecting the industry: Canned goods manufacturers overseas are facing simultaneous cost increase in all four of their major ancillary costs:
1. Energy (oil): as everyone that owns a car knows, gasoline prices have increased dramatically. In addition, several countries, such as Indonesia, have recently removed price controls/subsidies, making the increase faced by the industry even greater.
2. Cans (metal): the tremendous worldwide demand for steel has can costs up substantially.
3. Currency (dollar): for exporters to the U.S., the free falling dollar makes non-dollar denominated products that much more expensive.
4. Financing (interest rates): the Fed Funds rate in the U.S. is up five-fold, going up from 1% to 5% in just the past couple of years. Rates overseas are generally even higher than those in the U.S.

After a half year of relative stability, the dollar has fallen over the past several weeks by roughly 10% against most world currencies (from the euro to even the Thai baht). Unlike other “costs,” currency shifts cause a 1:1 inverse change in the cost of overseas items; i.e. a 10% fall in the dollar causes a 10% increase in the price of the imported product.

We attended the annual tuna conference, held last week in Bangkok, Thailand. Presentations from the scientists concluded that current fishing levels for yellowfin and albacore are at about the maximum worldwide sustainable levels. For skipjack, an increase in fishing could still bring additional long term growth. For the U.S. market, the presentations focused on the disappointment in pouch tuna for retail supermarket sales (shelf space dedicated to pouch is greater than the sales volume warrants), while on a positive note, a new national tuna advertising campaign is expected to lift overall sales of the category. With regard to the current market, fishermen are predicting a firm market with skipjack increasing from $950 to $1075 between now and October. Yellowfin has been tighter than skipjack, especially in Thailand, while tongol has been relatively steady. Albacore continues its long term trend of shortage and firmness. Some packers specializing in albacore are complaining that with not enough raw material available to operate their plants, they’re looking for alternate products.

Crop prospects in Greece continue to look good, with packers poised to have their best season in the past few years. Greek exports last year finalized at 252,000 mtons, up from 167,000 mtons in 2004. The best guess for the new season is that exports could limb to 290,000 mtons this year. Outside of Greece though, a worldwide worsening condition is developing due to below average crops in the U.S., China and South America. Furthermore, for the U.S. market, the dollar denominated price of Greek peaches, after converting from euros, has gone up proportionally to the currency change. Overall, Greece is expected to send needed peaches to U.S. shores, but unless the currency improves, pricing will be higher than expected just weeks ago.

After several disappointing seasons, the Asian pineapple outlook this year finally looks better than last year. The only holdup to a weakening market is the appreciation of the Thai baht against the U.S. dollar (also about 10%).

While the tomato outlook in Italy appears moderate compared to last season, the situation overseas appears better than in rain soaked California – especially for high end peeled plum tomatoes.

The currency strength of the euro vs the dollar continues to exasperate this season’s already firm market in green and ripe table olives.

Unlike table olives, for the past several years, olive oil has traded in a dramatic “opec-like cartel” manner. When the olive crop was plentiful last year, the large olive oil coops withheld oil in their tanks, successfully pushing up pricing. When the poor crop outlook for this season became apparent towards the end of 2005, the coops pushed pricing up even more – reaching new historic heights. However, unlike gasoline which experiences continued high demand even as prices peak, olive oil demand has slowed, and with it, the coops finally could not keep up. While the severe depreciation of the dollar should be drastically increasing olive oil pricing, weak demand is preventing packers from raising prices at all.

While supply is stable, the falling dollar is increasing Spanish artichoke prices by several dollars per case. South American artichokes, for those specs not exclusively Spanish, offers an opportunity to dampen this effect, but unfortunately supplies from the Southern Hemisphere are tight.