Fitch: Credit Risks Rise for U.S. Food, Agribusiness Sectors As Commodity Prices Soar

NEW YORK--(BUSINESS WIRE)--Fitch Ratings believes that U.S. packaged food and agribusiness companies face increased risk of credit deterioration as commodity prices soar, according to a special report.

'No company that operates along the food chain is immune from or hasn't felt the effects of high agricultural commodity costs,' said Wesley Moultrie, Senior Director, Fitch Ratings. 'Additionally, energy prices are also pressuring the operating segments of these companies.'

The agribusiness segment is experiencing strong market conditions globally, although rising earnings have been overshadowed from a credit perspective by weak cash flow from operations. Fitch's primary concern for agribusiness remains the mounting working capital usage that has led to prolonged negative free cash flow.

'Additional negative rating actions may occur if a decline in debt usage to finance working capital does not occur over the near term,' said Judi Rossetti, Director, Fitch Ratings. 'Capital expenditures may require some restraint to maintain current ratings, and the use of equity or proceeds from the sale of non-core assets to fund a portion of working capital needs would be viewed positively.'

Ratings for most packaged food companies are expected to remain stable in the near term. However, margin erosion, combined with more aggressive financial policies such as debt-financed share repurchases or acquisitions, could lead to negative rating actions. In contrast, protein processors are much more heavily affected by rising grain costs than packaged food companies due to the high percentage of feed costs required to produce protein products. Furthermore, there is the risk that cost-conscious consumers will shift more towards private-label products as food price increases are passed along to consumers.

Fitch notes also that recent stormy weather in the Midwest has led to further price spikes for agricultural commodities, particularly corn and soybeans. The price of corn is up approximately 24% and soybeans are up approximately 13% since the end of May.

The full report 'Flooding Exacerbates the Impact of Soaring Commodity Prices on U.S. Food and Agribusiness Companies' is available on the Fitch Ratings web site www.fitchratings.com.

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