Rising wheat prices weigh on ABF despite Primark success

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The Independent Online

Associated British Foods has warned that the doubling in wheat prices over the past year will force it to increase the price of a loaf as it became the latest company to warn about the rising cost of food.

Shares in the company fell 28.5p to 808.5p as ABF said full-year grocery profits will be impacted by losses in the bakery division, while across the group the strength of sterling would reduce profits by £19m.

There was better news on the high street. The group's successful Primark chain continues to perform well, despite the dismal summer, which has hit most fashion retailers. ABF said sales and profit at the budget clothing retailer "will be substantially ahead of last year", although operating profits will be affected due to discounting.

Primark has been expanding aggressively and now operates from 170 stores. It is due to open five stores in Spain, where it currently has two. Like-for-like sales at Primark were up 1 per cent in the second half of the year.

ABF said a relaunch of its Kingsmill brand in February had led to an increase in volumes and market share, which, together with a price increase from 88p to 96p, has led to an improved performance at its Allied Bakeries division. However, prices will have to go up again to recover "the recent sharp increase in the cost of flour".

The finance director, John Bason, said: "It's a matter of when, not if," adding that the company was in discussion with retailers about price increases. Last week, Premier Foods, whose products range from Mr Kipling cakes and Quorn to Branston Pickle, warned that the days of super-low-cost food are coming to an end as it announced an increase in the price of its Hovis brand. One major retailer had pushed up the price of a white Hovis loaf by 8p, taking it to more than £1, it said.

Wheat prices have been soaring on the back of global demand, particularly from Asia, and also to feed the boom in biofuels.

It is thought Kingsmill will have to rise to more than £1, in line with its competitors. Graham Jones, an analyst at Panmure Gordon, said losses in the bakery division could reach £30m this year.

Elsewhere, AB said profits at the group's sugar business were strongly ahead of last year because of its acquisition of Illovo, Africa's largest sugar producer and a strong performance in China. Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said: "This is a reasonably reassuring statement, although there are some definite challenges ahead.

"In the near term, it seems that the Chinese sugar operations, bolstered by its purchase of Illovo, will be the main provider of growth. In addition, the Primark business is nearing the end of its refit phase, but has continued to contribute in the meantime to overall profitability. Set against this, the 60 per cent rise in the wheat price this year and the advertising campaign on relaunching Kingsmill have both provided a drag on the grocery operations."