Food Industry Outlook

www.eulerhermes.us

VERSION 02 | YEAR 13

OUTLOOK: Positive fundamentals & outlook

◾ The 2012 drought’s impact on agriculture was not as severe as initially thought, resulting in agricultural commodity and food prices coming in below projections.

◾ As consumers embrace more nutritious diets, products like natural drinks and tree nuts that offer greater health benefits will continue to see growing demand.

◾ Increasing international demand for U.S. tree nuts will help maintain margins for local growers.

Key Points

Commodity price volatility has been the norm over the past several years in the U.S. food sector, as drought conditions in 2011 and 2012 have given way to excess rains in parts of the country in 2013. Farmers have planted record acreage and this year’s crop yields are expected to be much higher than they were in 2012. This has led to lower food price inflation than what has been seen over recent years, though many food companies have continued to benefit from the price increases they implemented in 2012 during a period of higher input costs.

As U.S. consumers become more health conscious, they are seeking out food, snacks, and drinks that are healthier alternatives to traditional processed snacks and canned sodas. This has forced companies like Coke and Pepsi to acquire manufacturers of healthy beverages in an effort to expand their product offerings to reach a younger generation that is concerned about what ingredients are in their drinks. Similarly, nut growers have benefited from the same trend as people are reaching for a handful of almonds and walnuts more frequently than in decades past.

Overview

The drought in the summer of 2012, the most severe and extensive in the U.S. in over 25 years, was expected to have a considerable impact on food prices. Grain and oilseed milling production was at its lowest level in five years just before the drought was in full effect, and further stress on production was expected to hit consumers’ wallets in the coming year. However, just as prices spiked in July 2012, production also increased for the next several months. The U.S. Department of Agriculture announced in April 2013 that inventory levels came in higher than projected and that farmers intended to plant more acreage in an attempt to cash in on higher prices, sending prices falling. As a result of the higher than anticipated commodity inventories, retail food prices saw low inflation. The USDA had initially projected food prices to increase 3% to 4% in 2013, though prices had only risen by 1.4% year-over-year as of July. The USDA has since revised its projection downward to a 1.5% to 2.5% increase for 2013. Looking ahead, the USDA is projecting a grain yield well above 2012, and prices, while still volatile, will be considerably lower for the remainder of 2013.

Current Situation

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Corn Wheat Soybeans

Key Domestic Crop Prices

Source: IHS Global Insight, Euler Hermes

Subsector Outlook: U.S. Beverage Production (non-alcoholic)The U.S. beverage sector has seen significant changes in recent years as health- conscious consumers have shifted their spending from carbonated sodas to healthier options such as naturally flavored non-carbonated drinks. Bottled water producers have also struggled as household incomes are still recovering from the recession and consumers have become more environmentally conscious. We expect growth over the next five years to come from healthy beverage options (those with lower calorie counts and natural ingredients), soda consumption is expected to decline while bottled water will see modest growth.

The U.S. beverage sector consists of three major players who, combined, control about 55% of the market. The remaining 45% includes private label brands and other manufacturers such as Nestle and Mondelez, whose beverage offerings in the U.S. are limited. While The Coca-Cola Company is the world’s largest producer of non-alcoholic beverages, PepsiCo is the leading producer of beverages in the U.S. Both company’s product offerings include sodas, juices, teas, sports drinks, energy drinks, and bottled water. Despite this diversity, PepsiCo saw volume declines in its U.S. beverages segment during 2012. Conversely, The Coca-Cola Company saw solid growth in its U.S. beverage business, driven by growth in still beverages such as sports drinks, teas, and bottled water. Both companies saw volume declines in their dominant soda segments, though price increases partially offset the impact of the lower volumes. Dr. Pepper-Snapple,

the number three beverage producer in the U.S., saw modest growth in its carbonated soda business based on its release of 10-calorie varieties of popular sodas such as Dr. Pepper and 7UP, once again confirming consumers’ preference for healthy beverage options.

Looking ahead, domestic growth for this sector will rely on expanding product offerings that address consumers’ concerns surrounding calories and ingredients. All three of the major players already offer products that appeal to health-conscious consumers, including PepsiCo’s Naked Juice and IZZE Natural Soda, and Coke’s Simply and Odwalla products. Other players include Campbell Soup Company’s Bolthouse Farms and privately held Pom Wonderful. As these products gain greater distribution and as local governments continue to increase the awareness of the benefits of a healthy diet, these and other beverages that appear to be healthy should continue to see volume and revenue growth.

Subsector Outlook: Tree NutsGrowing consumption of nuts can be linked to heightened interest in health and nutrition. Per capita nut consumption in the U.S. has continued to increase, topping out at 4 pounds in 2011 versus a 2.2 pound-average over the prior 25 year period. The most commonly consumed nuts in the U.S. are almonds, walnuts, pecans, and pistachios. Approximately 90% of nuts are grown in California, including virtually all of the country’s almonds, walnuts, and pistachios.

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Year 1980 1985 1990 1995 2000 2005 2010

Tree Nuts Per Capita Consumption in Pounds

Source: USDA

Producers are taking advantage of growing consumption in emerging markets, currently over half of all pistachios, almonds, hazelnuts, and walnuts grown in the U.S. are exported. Major customers include Hong Kong, Germany, and Canada, though local growers are not overly reliant on any one foreign market. Cashews account for approximately half of all nut imports, coming primarily from Vietnam and India. Pecans, while still popular in the U.S., have seen a spike in exports in recent years, primarily to Hong Kong and China. Growing international demand, coupled with a drought that damaged supply in 2011, led to a spike in prices and a 17% drop in consumption last year.

Going forward, local growers should continue to benefit from the increasing awareness of the health benefits surrounding nuts domestically, as well as growing demand for U.S. nuts abroad. Export volumes through June have increased for essentially all nut varieties, and this growing demand is expected to keep margins stable for local producers.

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Euler Hermes North America Insurance Company

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es.us Published 11/2013

Euler Hermes North America is the oldest and largest provider of trade credit insurance and accounts receivable management solutions. We offer both domestic and export credit insurance policies that insure against commercial and political risk in more than 200 countries worldwide. Euler Hermes maintains a database of proprietary information on more than 40 million companies worldwide and is rated A+ (Superior) by A.M. Best and AA- by Standard & Poor’s.

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