Published this week, the Supermarket Sweep on Rising Food Prices? The Conundrum Faced by Manufacturers and Consumers sets out challenges resulting from the recent market pressures on raw materials such as wheat and corn.
Prices for these have shot up as the biofuels industry started competing with the traditional food and feed market for the crops. To add to this, the concern over the ability to supply fossil fuels due to dwindling supply reserves, combined with the uncertain political situation in several of the major oil-producing countries, has resulted in sharp price increases in fuel and transport costs.
These, in turn, have also pushed up the price of food, which may travel thousands of miles to get to the consumer, said the group.
"At present, various raw materials used in the food industry are at critical levels of supply," it said.
Milk, wheat, sugar
Milk processors have been hard hit by the recent shortage of milk availability, which has caused prices to shoot up and has led some dairy firms to reformulate some of their products, such as Arla Foods.
"Many of these changes have arisen within the cheese industry, where there has been a focus on reformulating products to include various alternative ingredients, such as starch-derived formulations as dairy ingredient replacements," said Frost & Sullivan.
Some companies have prioritised their product ranges, removing some products from production to ensure that their most popular products remain on offer to consumers.
High wheat prices have also started to show their effects on industry. Tate & Lyle, for example, sold five wheat starch production facilities in Europe to Syral.
The consumer is also feeling the price pinch, with bread prices also having increased.
In addition, the research group states: "Rising prices on the world market have the potential to seriously erode profit margins for the producers. Associated British Foods reported a 12 per cent reduction in the profitability of its sugar business in 2007, due to the impact of European sugar legislation reform."
Impact on Food Manufacturers
The increased raw material prices have forced various companies in the market to search for ways to reformulate their ingredient listings in certain products, to offset the potential for a major loss in profit margins, said the report.
One way of boosting revenue and turnover has been a turn to value-added ingredients.
For example, Danisco is assessing the potential of a new range of emulsifiers in its forthcoming pipeline to reduce the dependency on cereals and vegetable oils in human food formulations.
CP Kelco intends to use its GENU pectins in yoghurts as a replacement for dairy ingredients, normally provided from skimmed milk powder or whey to provide functions such as creaminess and viscosity.
Palsgaard has also introduced a new emulsifier and stabiliser system known as IceTriple, which can reduce the amount of milk solids in ice creams by up to 25 per cent.
"Other manufacturers are expected to follow suit, where those who can be increasingly innovative will fare best in a challenging, competitive marketplace," said Frost & Sullivan.
The group said that food commodity and food ingredient prices are "definitely" set to remain at a high level for the next two to three years.
Indeed, according to the Food and Agriculture Organisation, increased costs for food production could remain for up to 10 years.
"The question must be asked, for how long can high prices be sustained by both industry manufacturers and consumers alike for value products? Increasing competition for prices may prompt a shift towards a greater purchase of supermarket own-brand products by consumers in an increasing number of food sectors, which will further hurt the margins of food industry manufacturers."
Other shifts will depend on consumer behaviour, as the level of awareness over the cost of food has yet to shift, said Frost & Sullivan.
"The current stranglehold on the industry appears to benefit only the supermarkets, who have still managed large increases in profit margins since the price increases began. Thus, the ultimate challenge will be to find some way of decreasing the grip of the supermarkets on an already overburdened industry, where finding other acceptable outlets for marketing food products without such an expensive middle-man are now vital," the group concluded.