May 29 (Bloomberg) — Dow Chemical Co., the largest U.S. chemical maker, may not be the last to raise prices this year because of soaring raw materials costs.
Monsanto Co., Hershey Co., General Mills Inc. and Avery Dennison Corp. may follow suit, according to data compiled by Bloomberg. They’re among 11 companies in the Standard & Poor’s 500 Index that increased their so-called LIFO reserve, which captures rising inventory costs, by at least 20 percent over the past four quarters.
With oil and commodity prices at record highs, companies will be forced to pass on higher costs, analysts said after Dow Chemical announced yesterday it will raise prices by the most in its 111-year history. That will contribute to inflation, and may prompt the Federal Reserve to raise interest rates for the first time in four years.
“We are going to see a cascading of higher prices through the system,” said Steve Hoedt, who helps manage $34 billion, including Dow Chemical shares, at National City Corp. in Cleveland. “Companies that are able to push prices through to their customers are the ones that are going to be successful.”
Avery Dennison, the world’s largest label maker, tripled its LIFO reserve to $76.4 million, the most of any company in a search of Bloomberg data. Hershey, the candy maker; General Mills, the seller of breakfast cereals including Cheerios; oil company Hess Corp.; and Precision Castparts Corp., a maker of metal components, increased their reserves more than 60 percent.
30 Percent Increase
Monsanto, the world’s biggest seed maker; Occidental Petroleum Corp.; Cooper Industries Ltd., which makes electrical products, and media company Meredith Corp. increased their reserves more than 30 percent. Chemical company Ashland Inc. and drugmaker Eli Lilly & Co. boosted reserves more than 20 percent.
LIFO stands for the last-in-first-out method of accounting for the value of a company’s products. It means that the most recently acquired materials are the basis for the cost of the goods they sell.
In practice, companies get rid of their older items first, in the FIFO, or first-in-first-out, principle. To account for the difference in the two methods, the companies create a LIFO reserve, which becomes a proxy for the inflation of their costs.
Federal Reserve Board policy makers estimated in April that consumer prices, minus food and energy costs, will rise this year by 2.2 percent to 2.4 percent, up from a range of 2 percent to 2.2 percent in January forecasts, according to central bank figures released on May 21.
More Costs
Rohm & Haas Co., the world’s biggest maker of acrylic-paint ingredients, said yesterday that rising energy and petrochemical prices will add a record $500 million in costs. The company’s LIFO reserves increased 35 percent in the year to March 31, according to data compiled by Bloomberg.
Minneapolis-based General Mills, the second-largest U.S. cereal maker, boosted its reserve to $131.7 million in the quarter through Feb. 24. Hershey, based in Hershey, Pennsylvania, raised its reserve to $130.9 million in the three months through March.
Wheat, corn and rice have risen to records this year because of shrinking global stockpiles and rising demand. The United Nations’ Food and Agriculture Organization forecast world food imports will cost a record $1.04 trillion this year, $215 billion more than in 2007.
“At food companies in general, you’ll find an uptick in inventory levels just because they’re holding things that are more valuable than they used to be,” said Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Missouri. “That, in and of itself, has been causing higher prices for the consumer.”
Falling Profit
Rising costs for cocoa, energy and milk forced Hershey, the largest U.S. chocolate maker, to increase prices on a third of its candies in January. Net income in the three months through March fell 32 percent, a sixth consecutive quarterly decline.
Hershey projects that input costs will rise by $100 million this year, Chief Financial Officer Humberto Alfonso told analysts April 24. Kirk Saville, a Hershey spokesman, said the maker of its namesake chocolate bars and Reese’s Peanut Butter Cups doesn’t comment on plans for prices.
To blunt higher costs in the past year, General Mills charged more for cereal, Progresso soups, Yoplait yogurt, Pillsbury breakfast pastries and Green Giant canned vegetables.
General Mills
Cost reductions, including savings on packaging, helped profit rise 61 percent in the three months through Feb. 24. Thomas Forsythe, a General Mills spokesman, didn’t return phone calls seeking comment.
Rising natural gas and crude oil prices are increasing costs for naphtha and other energy-derived chemical ingredients, squeezing chemicals makers such as Ashland. Representatives from Ashland and Monsanto didn’t return voicemail messages seeking comment.
Crude oil traded in New York doubled in the past 12 months and reached a record $135.09 a barrel on May 22.
The 10-year Treasury note’s yield touched 4.03 percent yesterday, the highest level since Jan. 2. Futures on the Chicago Board of Trade indicated a 70 percent chance the central bank would increase its target rate for overnight lending between banks by at least a quarter-percentage point in December.
Arnold, the Edward Jones analyst, said commodity costs will continue to drive prices charged by companies.
“There’s been waves of them for well over a year now,” he said, referring to price increases. Any further round, he said, “depends where commodity costs go.”
To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at [email protected].
Last Updated: May 29, 2008 01:25 EDT
Source: Bloomberg