2009 to be tough year for food industry

Dioxin scares and a rapidly devaluing sterling signals a difficult year ahead for producers, writes Laura Slattery

AS GLOBAL havoc is caused by financial derivative products so complex that they can only be understood by the physics graduates who designed them, the simplicity of anchoring the economy on the production of food is, in theory, appealing.

Ireland is supposed to be good at all this agribusiness stuff, right?

It was looking like the food industry was going to have a relatively good recession with processing companies breathing a sigh of relief at the unwinding of 2007's commodities price spike, the biggest of the quoted food companies outperforming other Irish shares on the stock market (admittedly not hard) and the knowledge that a complete drying up of consumer demand is a biological impossibility.

Nevertheless, the food sector ended 2008 deep in the mire, with a disastrous run into Christmas.

First up was the pigmeat dioxins debacle, which threatened up to 1,800 jobs and forced those householders who favour advance festive preparation to dump their hocks of ham, most of which would have been dioxin-free.

In an industry where smart, hiccup-free marketing takes a prominent role, the blanket recall of Irish pork from more than 20 overseas export destinations has not exactly been doing any favours for Ireland's reputation for "quality" meat.

It wasn't the first food scare of the year, either: in August, Dawn Farm Foods closed its Naas plant for a week after a salmonella outbreak was linked to a particular production line at the plant.

But if your modest food business wasn't wiped out by a contamination scare, along came a currency crisis to do the job.

In the third week of December, sterling weakened to the point when parity with the euro seemed only to be a matter of time. With the euro breaking through the 95p level, having started the year as low as 65p, food exporters to the UK found themselves obliged to suck up a 30 per cent slide in their competitiveness.

This, many will find, is simply unsustainable, and with more than 40 per cent of food exports shipped to the UK, job losses in 2009 are inevitable, according to Ibec-affiliated lobby group Food and Drink Industry Ireland (FDII).

But what does the future hold for the big food stocks?

The biggest of these, Kerry, has seen its share price fall by around 33 per cent this year (up to December 19th) - not bad, when the overall Iseq index fell 66 per cent over the same period.

In its last interim management statement, Kerry said it expected to overcome "challenging economic conditions" and the negative effects of a weak sterling to record "a good out-turn" for 2008.

Equity analysts agree, with the food group popping up on both Goodbody and Bloxham's stock picks for 2009.

Under Stan McCarthy, the former head of Kerry Ingredients America and current group chief executive, Kerry has diverse income streams, with ingredients and flavours likely to provide growth spurts should sausage sales prove subdued.

The attempt to snap up Breeo's Irish consumer foods portfolio may not have come off.

However, for investors, the real allure of Kerry is its strong balance sheet.

Glanbia's year, however, can be described as a lucky escape. Having discovered it has bigger fish to fry overseas, Glanbia initiated its exit from the Irish pigmeat business just in time, with the management buyout team at Rosderra Meats left bearing the brunt of the dioxin scare.

Glanbia now has the opportunity to ramp up its dairy operations in the US and develop new markets in Asia.

It was a big year for the company formerly known as IAWS, which merged with Swiss bakery group Hiestand to form Aryzta, although the stock was recently knocked by a downgrade by Goldman Sachs analysts, who said it was overreliant on the US market and premium goods.

Aryzta holds a majority stake in Origin, the agri-food merchants, popular with some analysts for its ability to generate stable if unexciting earnings - "a welcome pattern in current markets", according to Bloxham.

Origin bought agronomy specialists Masstock during the year, extending its commercial reach to more than 10,000 arable and grassland farms in Britain and Poland.

Greencore, however, had a mixed year.

It has a new chief executive, Patrick Coveney, and made a significant new acquisition in the untapped US convenience food market. Moreover, it finally got the sugar restructuring aid it wanted.

But as the UK is its main market, earnings are being hammered by sterling's weakness. in addition, there was the uncomfortable episode of fraud at its Scottish water plant.

Finally, Fyffes was hit by supply chain costs, with packaging and shipping expenses ramping up during the year. Banana prices were weak for the best part, prompting a profit warning in August. The unfavourable dollar was also its undoing.

Overall, it would appear that the food sector is far from recession-proof. While everybody has to eat, it is becoming apparent that not everybody has to eat quite so much.

With the Central Statistics Office retail sales index showing that sales of food declined 7 per cent in volume over the past year and sterling still busy slashing export earnings, FDII says the industry faces "unprecedented challenges" in what may well transpire to be a difficult 2009.