Still waiting on consumer spending

by Morton Sosland
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As a staunch proponent of consumer products companies in grain-based foods doing everything possible to capture volume increases made likely by the so-called oil dividend, looking at the result so far is disappointing. Not only have the first-quarter sales and earnings reports of leading companies in grain-based foods fallen short of stellar but in some instances have been disappointing. While the decrease of less than 1% in flour production by U.S. mills in the first quarter of this year is not a serious setback, the direction of that change from output a year earlier does not earn a favorable grade. With such results, the time is at hand for examining why the halving in oil prices in the last six months of 2014 has not prompted increased consumer spending on products made by grain-based foods.

If it’s any solace, it may be noted that grain-based foods is not the only industry or market observer wondering what may be going on to produce so little effect from such a dramatic drop in energy prices and the billions of dollars provided to consumers. The Federal Reserve Open Market Committee, which provides important guidance to the Board and economic commentators, noted this anomaly in saying: “The expected boost to household spending from lower energy prices has apparently so far not materialized.” Everything from severe winter weather, a slowing in economic growth and moderate gains in hourly earnings are cited by the committee to explain the lag.

This leaves the question of whether consumer spending eventually will show the momentum expected from the oil decline, even though gasoline prices have slightly rebounded. According to the Open Market Committee, even if the oil fall comes to a halt, chances are good for buoyant consumer spending reversing the weakness shown in the first quarter. Optimists on the committee point out that the first quarter weakness was largely due to transitory factors like the winter weather.

In its recent minutes, the Open Market Committee points to a seasonal pattern that is also starkly evident in grain-based foods, and that is the relative weakness ruling in the year’s January-March quarter. “The first quarter tends to have weaker seasonally adjusted readings on economic growth than do the subsequent quarters,” the Committee notes. It adds that “this tendency” supports the view that economic growth will regain its moderate pace as the year progresses. The same may be said about wheat flour production patterns where first-quarter output historically ranks as the smallest for the year. That has been the case in eight of the past ten years.

Achieving significant sales growth in the food marketplace is no easy task under the best of conditions. In a market like the one currently unfolding, the task facing grain-based foods is amplified by how the marketplace itself is changing to recognize rising consumer desires for foods that benefit health and wellness as well as offering simplicity. Considering the avid pursuit by other food industries of a similar result, capturing even a modicum of consumer spending becomes a difficult undertaking. Its toughness is defined by recognizing that grain-based foods will be fortunate to maintain its market share in an environment where all too many competitors attack the elements of grain-based foods that the industry has long considered beneficial. As easy as it may be to make fun of some of the outrageous nutrition claims that are being heard daily, it must be understood that a new generation of consumers, named the millennials, is captivated by crazy assertions.

As employment levels and workers’ wages are starting to rise, offsetting the weaker dollar and cautious capital spending by business and government, consumer spending looms as the positive economic force. Optimism depends mainly on consumer spending growing robustly in the face of slackness in other demand components. If this outlook is correct, then grain-based foods has a fighting chance to boost its share of these expanding outlays.

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