Low Commodities Prices Hurt Farmers and Consumers Alike

09/07/2012
 
Low Commodities Prices Hurt Farmers and Consumers Alike 
THE WALL STREET JOURNAL (USA)
 
Nestlé CEO Says Pushing Down Agriculture’s Raw-Material Income is not in Anybody’s Best Interest

Paul Bulcke took the helm at Nestlé SA, the world’s largest food company, just five months before the collapse of Lehman Brothers in 2008. The global economy hasn’t given him much of a break since.

The U.S., Nestlé’s biggest market, has staged a halting recovery. But conditions have only worsened in the Swiss company’s backyard, as one European country after another has slipped back into recession. Meanwhile, the Swiss franc has, for a year, hovered near a record high against the euro, cutting into profits.

Mr. Bulcke has kept slow growth in Europe and the U.S. from dragging down Nestlé’s sales by aggressively pushing into fast-expanding emerging economies and finding new ways to sell to struggling rich-world markets. Single-serve Dolce Gusto coffee capsules, launched in Europe in 2006 as a new way of drinking instant coffee, are on their way to joining the likes of Kit Kat and Lean Cuisine as one of Nestlé’s “billionaire brands” with over 1 billion Swiss francs ($1.03 billion) in annual sales. In April, Nestlé outbid Danone SA in its $11.9 billion acquisition of Pfizer’s infant nutrition business, giving it a leg up on the booming baby food market in developing countries like China. The company’s stock has outperformed rivals Danone and Unilever so far this year.

Nestlé isn’t out of the woods yet. Mr. Bulcke says a 30% year-on-year drop in coffee and cocoa prices—two of Nestlé’s most important commodities—is unlikely to last. And the franc has showed no signs of coming off its peak.

Mr. Bulcke spoke with the Wall Street Journal on the sidelines of the B20, a gathering of business leaders held alongside the Group of 20 summit. Edited excerpts:

WSJ: How are Europe’s problems affecting Nestlé?

Mr. Bulcke: If everything was about the euro crisis in the world than we would be badly off. But there’s so much other good stuff happening. There are many other parts of the world where you do have growth. This is softening a little bit this growth, but it’s still quite vigorous. You have 80% of the world population working for a better tomorrow. They smell a better tomorrow. And that’s what we are as a company, we are linked with that part of the world.

WSJ: So is what happens in Europe irrelevant?

Mr. Bulcke: It is clear the euro crisis is shaping the environment where we operate. Uncertainty is increasing, where the consumer is having less confidence, and is holding back. That affects our business. At the same time this is an opportunity.

WSJ: What are the opportunities in Europe?

Mr. Bulcke: Dolce Gusto is a system that we launched just before the crisis, and that is quite a premium product, so [2006] would by all logic be the worst of times or moments to launch a new concept like that. Now it is over 650 million [francs] in sales, and we’re rolling it out worldwide now too.

WSJ: A quarter of your business comes from the U.S. Do you see that changing?

Mr. Bulcke: We’re investing very heavily in our [U.S.] brands [and] our factories there. But… more than 50% to 60% of the last several years of GDP growth in the world has come from developing markets. It is clear by the mathematics the emerging markets are going to be more important. Well, we are a global company. The developing markets are going to gain in importance for us in the mix of ours sales. But that’s a natural, logical, I’d say healthy evolution.

WSJ: A few years ago if someone had told you the franc would be at 1.20 to the euro for a year straight and even stronger before that, what would you have thought?

Mr. Bulcke: I would say ‘Jesus!’ But Nestlé is very decentralized. We produce with local raw materials as much as possible. In that sense we have a natural hedge.

WSJ: You’ve had some perhaps unexpected savings from lower commodities prices this year. Does it go back to the consumer?

Mr. Bulcke: We don’t price our products on the peaks. Four years ago, milk all the sudden went from $1,800 a ton to $5,500. We didn’t multiply the price of our products by four. We said $1,800 was definitely too low [and] saw a sustainable [range] of $3,000 and $3,500. And guess what, we are down to $3,500. Part of our job is to try to read through these turbulences and not create the same nervousness on [retail] prices as [our] raw materials.

WSJ: If this latest drop is sustained will you face pressure to lower your prices? And at same point do you?

Mr. Bulcke: You would expect me to say I want [raw materials costs] as minimum as possible. [But] a minimum price that demotivates farmers is not in our interest. Then you see the plants are not replaced with quality and the quality of raw materials comes down. A healthy price on agricultural produce is healthy long term.

WSJ: Are we at healthy prices now?

Mr. Bulcke: I do believe this range is of more interest to farmers, more than it was five or six years ago.

WSJ: Your head of procurement about a year ago said in an interview with the Wall Street Journal that this unprecedented increase in commodities prices would continue for a few years. Has the outlook changed?

Mr. Bulcke: The underlying trend is definitely going up and I’ve found it even positive [for us]. When demand and supply are tense you start to have higher volatility, which is normal.

WSJ: How are higher commodities prices a positive?

Mr. Bulcke: [Prices had] gone down to a point that agriculture [was] not of interest to governments, [there was] no interest [in] R&D. And so now that prices are going up it starts to be something that is of interest. Remember, we have to prepare ourselves to feed nine to 10 billion in a few years. The technologies, the practice and new ways of going about agriculture are all there. We have to embrace it.

WSJ: Now that agriculture is back on the radar, what sort of policies would you like to see?

Mr. Bulcke: Investment—not only in agriculture directly, but access to markets. It’s also linked with discussion about water. One third of the population is in water-stretched areas, and that percentage goes up very, very fast. You need water to make a Nescafe. Water is important to us.

WSJ: The [United Nations] Food and Agriculture Organization says a lot of people don’t have access to the foods that are being produced. Is there anything Nestlé is recommending in response to that?

Mr. Bulcke: There must be access for farmers to the market; 30-40% of all that is produced in the fields is not really consumed. In the developing world, it is because it doesn’t get to the market because of infrastructure. If produce comes into a harbor and it needs two weeks to be cleared, for example, the import facilities don’t help. Many of these products do not get better if they are two weeks in containers in the burning sun.

We are setting up new kinds of factories that are closer to the consumer. That creates faster and shorter supply chains. For example in Abidjan [Ivory Coast], we have used cassava, which is from there. Products where we’re using [cassava] were conceived and designed in Europe. You don’t have a lot of cassava in Europe, so it’s not part of the [original] formula. But you can actually replace some imported raw materials that we used in the Ivory Coast factory, we can use cassava.

You can say yes, that’s small but, you know, with small-stake farmers, it’s many small steps that helps them.