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Sector in focus: food producers

With supermarket price wars hitting the headlines, it is clear that food producers will be feeling the effects as products are substituted or contracts renegotiated. However, how is the sector really faring?

A Tate & Lyle sugar bag
Source: Bloomberg

Food producers sector

A good place to start is with the sector as a whole. The IG platform allows you to trade the Food producers’ index, which includes Associated British Foods, Cranswick, Dairy Crest, Greencore and Tate & Lyle. Price action has clearly been consolidating recently, following a strong performance over the 2009-13 period. The price is currently at the top of the descending channel which has dominated 2015 so far. As such, it is likely that we will see a continuation of this pattern, thus pointing towards a period of weakness in the coming weeks. However, with price currently so close to the channel top, there is a clear possibility of a break higher. Should we see the price close above 8133, this could mark the beginning of a bullish period and would likely lead to a move to 8306 and 8448 in time.

Considering the clear respect of the 50% Fibonacci retracement in April, there is a possibility that we may have seen the completion of this correction and that would mean any downside would likely provide a low that is higher than 7513. However, either way, the current position of the price means that price action over the coming days will likely determine trading for weeks to come.

Food sector chart

Cranswick

The share price of the meat-focused producer Cranswick (+17.5% YTD) is a testament to the strength of both the brand and the products, with the firm bucking the market trend by raising revenue via a greater focus on premium products. With the price having closed above of the upper Bollinger band for four consecutive weeks, it is clear that the rise has been extraordinary recently. However, given that the current consolidation is still trading upwards, there is clear bullish momentum behind this stock. Consequently, I believe that any retracements will be bought into and it is only a matter of time before the stock pushes up towards the £17 and £18 regions.

Cranswick chart

Tate & Lyle

Unlike Cranswick, Tate & Lyle has not managed to deal with the ultra-competitive environment in a great way, and as such we have seen significant deterioration (-38%) in its price since the 2013 peak of £8.90. Unfortunately, the firm does produce a vast amount of products which are relatively easily to substitute and there is a clear need to move into developed products rather than basic goods such as sugar. The firm has been operating in a tough environment as supermarkets aim to cut costs, and this has been shown in the share price.

The clear staggered move lower since mid-2013 has seen a circa four-year low this month, and signs are that we will see further deterioration over time. The trend shows that we are likely to see prices begin to rise soon enough to establish a new lower high (below £6.61). As such, I am bearish, but will await a move higher towards the £6.25 region to then look for indications that we are about to see the next leg lower.

Ultimately, it is clear that the ability to differentiate your products is key to surviving in a tough business environment. Therefore, I would expect this market pattern to favour those producing high quality, highly branded meals as opposed to producers of relatively generic basic foodstuffs which retain little brand loyalty. The example of Cranswick vs Tate & Lyle shows exactly that.

Tate & Lyle chart

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