Lees faces pressure from coconut price surge

Despite the upbeat trading statement from Lees last week showing sales had reached another record high, at approximately £18.7m for 2010 and about 2.5 per cent ahead of sales the previous year, the firm’s chief executive officer, Clive Miquel, said that the increase in both commodity and packaging prices at the end of 2010 were unprecedented.

Coconut prices have risen from £0.73/tonne to the current price of £1.75/tonne in recent weeks and costs in plastics and packaging have also increased at a double digit rate.

"The price of coconut, an important ingredient for Lees, has more than doubled over recent months,"​ continued Miquel. But he cautioned that it was “too soon to estimate the net impact on the business for this year.” ​

The Scottish sweet maker uses coconut in many of its products such as macaroon bars and snowballs.

Time lag in recovery ​

Analyst group, Shore Capital, notes that Lees Foods has reported sound trading for the 12 months to 31 December 2010, in-line with expectations, and it claims the confectioner’s cash generation has been robust.

However, the research firm particularly notes the pressure from the hike in coconut prices on the Scottish confectioner, and they estimate up to half a year in terms of rebound from such cost pressures. The analysts thus downgraded profit forecasts for Lees from £1m to £800,000 for 2011.

“Whilst management is seeking cost recovery through efficiencies and price increases, we believe it is prudent to presume a time lag in cost recovery (we estimate 3-6 months) and despite our sales volume expectations remaining robust we believe it is prudent to forecast the group H1 (particularly Q1) EBIT margin to come under pressure,” ​said the research firm.

Coconut harvests hit ​

Bad weather has hampered coconut production in India, with harvests in the region of Kerala, which grows more than a third of India's coconuts, down from 15 to 20 per cent this year.

Last month, the government in Sri Lanka, one of the leading producers of coconuts, tried to intervene in the market to dampen the coconut prices, and it banned the felling of coconut trees without permission.

The hike follows several years of low prices for coconuts encouraging farmers to grown alternative crops, such as rubber, coupled with steep increases in cost of fertilizer.