Business | Opinion
Biofuel demand creates chain reaction
Food companies such as Unilever, Nestle and Cadbury could face higher commodity costs over the long term as rising demand for biofuels pushes up prices for raw materials such as wheat, corn and sugar, according to a report by Goldman Sachs.
- Financial Times
- Published: 00:00 July 25, 2006
Food companies such as Unilever, Nestle and Cadbury could face higher commodity costs over the long term as rising demand for biofuels pushes up prices for raw materials such as wheat, corn and sugar, according to a report by Goldman Sachs.
The development of bio-fuels - fuels produced from renewable organic sources such as corn and sugar crops - is starting to accelerate more rapidly as governments seek alternatives to more expensive oil-based energy sources.
Demand for biofuels is pushing up crop prices, making it more expensive for food companies to source the raw materials used in their products.
"Rising crop prices for wheat, corn and sugar as the biofuels market develops globally could signal prolonged food industry cost pressure," Goldman analysts said, adding that they expected the biofuel industry to compete with the food industry for raw materials.
Many food companies have warned that they are experiencing higher commodity costs, but few have outlined how they will cope with the increase in costs over the long term.
Some companies have indicated they are thinking about making changes to packaging to bring down costs.
Heinz recently said that it was considering using thinner plastic packaging, as well as standardising some packaging such as the plastic caps on bottles on "top down" bottles of HP Sauce and Heinz ketchup.
Goldman estimates that more than 60 per cent of arable land in the European Union would be needed to meet the demands of the biofuel industry if the region was to replace 20 per cent of the fossil fuels used in transport with biofuels.
This would put pressure on the amount of land available to produce crops for food.
However, the bank said that changes in the energy industry would open up new opportunities for companies that process food products, including Suedzucker, Tate & Lyle, and Associated British Foods.
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