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The Rice & Wheat Prices Crisis
Perspective | 18 May 2008
By: Xavier Lim
Articles (51) Profile

Regional leaders said that soaring food prices may throw millions of Asians back into poverty, undo a decade of gains and stoke civil unrest, as they urged a boost to agricultural production to meet rising demand.

World Bank President Robert B. Zoellick said that based on a very rough analysis, he estimated that a doubling of food prices over the last three years could potentially push 100 million people in low-income countries deeper into poverty. This is indeed very frightening!

Estimated by Asian Development Bank (ADB), about 20% of people in Asia, home to two thirds of the world’s poor are presently living on less than US$1 a day. The price of wheat has went up 120% and rice price was up 75% this year due to lower agricultural production, weather shocks, more meat consumption, and shifts to biofuel crops.

ADB also estimated that the poorest people in the Asia Pacific region spend 60% of their income on food and a further 15% on fuel – the key basic commodities of life which have seen their prices rise relentlessly in the last year. There are concerns that prices could rise a further 40% in coming months and stay high through 2015.

TOUGH FUTURE FOR FOOD BUSINESS

Apex-Pal International (APL), famous for its Sakae Sushi restaurants reported that its FY07 earnings fell by 55% to $2.26m from $5.08m in the preceding year. Due to the impact of rising rice prices, APL is probably feeling another round of earnings squeeze. Prices of rice, a mainstay in APL’s sushi business, have risen by about 30% in the past three months, according to local importers. Energy prices have also added to its cost pressure, as most of its raw materials are imported from overseas.

Recently, APL has adjusted its selling price due to rising food prices, but it may not be able to offset the high cost pressure. Moreover, customers may order lesser dishes or dine in due to rising of its normal sushi (coloured plate) price. Not only does APL have to cope with the rising rice and energy prices, it also has to cope with the soaring rental rates.

Another food company that was strongly hit by the rising commodity price is BreadTalk. Although BreadTalk’s FY07 earnings more than doubled due to strong growth in all its business segments, BreadTalk will have difficulty in maintaining its gross profit margin in this segment in coming months, as bakery business is the largest revenue contributor.

Rental rates that have been soaring since 2007 will definitely slam hard on BreadTalk’s restaurant business. But we remain optimistic for its food court business and believe that it will bring in more revenue for the company. Nevertheless, BreadTalk’s thin profit margin remains a concern.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.


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