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Fitch: Higher Costs Restraining Growth for Global Fruit, Vegetable, and Dairy Industries

Posted on: Tuesday, 8 November 2005, 15:00 CST

The global produce and dairy industries face a mixed outlook as companies stand to benefit from changing consumer dietary trends and nutritional guidelines, but costs in marketing and distribution continue to rise, according to a Fitch Ratings report.

The U.S. Department of Agriculture (USDA) and World Health Organization (WHO) have published guidelines recommending increased consumption of fruits, vegetables, and milk, and although changes in consumer diets are typically gradual, companies such as Dole Food, Del Monte Foods, and Dean Foods are well positioned to benefit. Potential revenue increases, however, come amid record high levels of fuel and packaging costs, which are not expected to decline materially in the near term.

'Relative to other food categories, the fruit, vegetable, and milk product segments are mature, low margin and overly exposed to weather-related and agricultural policy risks,' said Wesley Moultrie, Senior Director, Fitch Ratings, 'These segments are dominated by high yield-rated companies that have changed strategies over time to deal with the shifting dynamics of the business.' Over the years, many of these companies have divested non-core businesses in order to dedicate resources to core operations. Today, most of these companies are focused on diversifying into more profitable and faster growing products, such as ready-to-eat packaged produce and organic foods.

For global marketers of fresh bananas, the outlook is further complicated by a potentially significant increase in European Union (EU) import tariffs scheduled to go into effect on Jan. 1, 2006. Although several scenarios are possible, Fitch expects the eventual implementation of a tariff-only system to cause significant volatility in both banana supply and pricing and to negatively affect the margins of all the major banana marketers.

From a credit perspective, high yield companies have been taking advantage of lower interest rates to refinance debt, but higher fuel and packaging costs are pressuring operating earnings and cash flow. In addition to the day-to-day challenges of running these commodity businesses, increased debt from acquisitions and capacity constraints in higher-margin categories have resulted in these high yield companies facing both above average financial and operating risks, according to the report.

The full report 'Global Changes in the Fruit, Vegetable and Dairy Industries: Who Will Benefit' can be found on the Fitch Ratings web site at www.fitchratings.com. Financial and operating reviews/outlooks for Dean Foods, Del Monte Foods, and Dole Food are also available on Fitch's web site.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Business Wire

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