Chiquita Slips on High Costs

This post first appeared on Minyanville.

Food-makers are struggling to maintain margins as persistently high commodity prices pressure already slim margins. Some firms are even shrinking boxes to sustain profitability. Unfortunately for Chiquita Brands (CQB), it can't sell half bananas.

Yesterday, the purveyor of bananas and other fresh fruit warned investors of an ugly third quarter. The company said higher input costs, bad weather in Latin America and weak seasonal demand for fruit will push it to a loss for the quarter ending July 31st. Shares traded down sharply, off 28%. Competitor Fresh Del Monte Produce (FDP) also took a beating, tumbling nearly 16%.

Chiquita said that although its banana prices are steadily rising, tepid demand and thinner margins are eating into profits. The company expects to return to profitability later in the year, indicating an expectation that higher fertilizer and fuel costs will subside and more normal buying patterns will return.

In an effort to fend off skyrocketing commodity prices, food makers like Chiquita are being forced to pass higher input costs along to consumers. Professor Depew notes some firms are resorting to smaller sizes in an attempt to bring their offerings more in line with shrinking demand. General Mills (GIS) is reducing cereal box sizes, Wrigley (WWY) is dropping the number of sticks in each package of gum and Coca-Cola (KO) and Pepsi (PEP) are ditching the 20-ounce soda in favor of the smaller, 16-ounce size.

Other companies, like Kraft (KFT) and Sara Lee (SLE) are simply raising prices.

Fruits and vegetables aren't what one would normally consider discretionary purchases. Unlike plasma TVs and Nintendo Wiis (NTDOY), humans don't survive very well without vitamins and minerals. But as consumers trade down and opt for more affordable food items, nutrition often suffers. If this trend continues, we could see our already abysmal diet slide further into the deep fryer.