Rabobank Group

Soft drink companies have seen their bottom line increasingly affected by rising commodity costs. Aluminium, used for cans, has increased by over 60% between June of 2005 and December 2006. Rising corn prices, driven by the current ethanol boom in the U.S., drove HFCS prices up by 25% in just three months, between September and December of 2006. Orange juice prices have seen even more drastic increases, rising by over 200% since June 2005.

All of these commodities are key input costs for soft drink companies, particularly in the U.S. While all companies have been affected by the increase in input costs, private label has been the most affected, as their cost of goods sold is a much higher percentage of the final sales price than for branded products. Soft drinks companies have responded to the current dilemma by raising prices. This has allowed the companies to maintain revenue growth, but also appears to have a positive correlation to loss of market share.

The present Industry Note examines the key drivers behind the recent price increases of each of the affected commodities, with the intent of helping to gauge future trends. Perhaps more importantly, the Note reviews basic commodity hedging tools as well as the fundamental criteria for appraising and selecting a given tool. 

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