>Does food price shock pose earnings risk to Staples?

We assess the impact of a significant rise in select agri-commodity prices on EM/APxJ Staples sector in particular. The rally mainly in corn, soybean and wheat has led to a 10% increase in CRB food Index since the end of May.


This price move will negatively affect some of the downstream consumer staples names which are major users of these commodities and have limited ability to pass through the rise in input cost to the consumer. So far, Morgan Stanley analysts in APxJ & EM suggest limited impact on the staples stocks due to strong pricing power and, in some cases, domestic sourcing of these commodities where prices are restrained. However, in the past, sudden rises in CRB Food Index have been associated with poor earnings revision breadth relative to EM and consequently weaker relative performance.


Moreover, Consumer Staples sector has systematically outperformed the EM benchmark since Q1-11. At the same time, its P/B premium to EM is at an all-time high at 143% versus 10-yr average of 59% and significantly above levels seen in 2009 (112%) or 1998 (128%).


We collaborated with our Staples analysts to gauge the impact on earnings due to the recent rise in input prices. In cases where input prices have not risen, we provide an earnings sensitivity analysis based on a 10% increase in key input cost. The earnings impact incorporates the pass- through capability of the company in the current environment. See Slides 6-10 for full list of stocks.


At a macro level, our Asia Economics team expects this price rise to have an impact on food inflation in the region. Even though India is relatively less affected by these global developments, it is experiencing below-normal monsoons, which could pose upside risks to its food inflation.


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