Stronger euro may hurt food firms

EARNINGS of publicly quoted Irish food companies could come under pressure next year, a new analysis of the sector has warned.

Bloxham Stockbrokers believes the growing weakness of sterling and the US dollar will hurt earnings of key publicly quoted food companies next year. Since June, the dollar is down 16% on the euro while sterling has declined by 9%.

Agrifood companies face this hurdle for translated and transaction-driven profits during 2011, with the most exposed being Greencore (95% of sales), Kerry (68%), Glanbia (62%) and Aryzta (50%).

Drinks group C&C is 65% exposed to sterling, the broker said.

Bloxham says while all the firms have hedging programmes that protect them from short-term changes, “a prolonged period of euro strength will challenge growth budgets for 2011.”

For some time, analysts have raised concerns about impending dollar weakness.

At the root of their concern are fears about the robustness of the US recovery.

That lagged in the last quarter, suggesting that interest rates will stay low.

Of greater concern is the threat of further credit easing to support the flagging economy.

Federal Reserve chairman Ben Bernanke has not showed his hand fully but markets sense that a further round of quantitative easing is on the cards and that has been enough to put further pressure on the dollar.

Bank of Ireland’s chief economist Dan Mclaughlin recently forecast that the euro will strengthen against the dollar and will end the year higher. Also, a number of US trading partners are not prepared to see their currencies rise against the dollar, including Japan and China, “but the euro area has no such policy.”

Moreover, economic activity surprised to the upside in Europe over the summer months and the ECB has revised up its forecasts of GDP and inflation for this year and next.

Those factors all combine to make the euro stronger and will, if sustained into next year, put extra pressure on food and drinks exports.

Kerry Group, with sales across the globe, is probably the least vulnerable due to its go-to-market strategy which is delivering good returns in the US. The currency weakness has wider implications for the Irish food and drinks sector, responsible for close to €8 billion in export sales.