Soaring commodity prices are pushing food companies to make some tough decisions.

A sharp climb in costs for wheat, dairy and crude oil has forced firms ranging from cereal companies to cheese makers to raise their prices. But while the higher prices have helped keep profits robust, they also run the risk of forcing consumers to buy less or to look for better bargains.

Cereal makers have been pushing their prices higher to bolster earnings, but at least one measure points to a drop in volumes of ready-to-eat cereal over the past year in many stores. Cereal companies have been successful in raising prices, but they may be “forcing their core consumer to other options,” said Burt Flickinger, managing director of Strategic Resource Group, a food-industry consulting firm in New York. Those options could include anything from a fast-food breakfast to frozen offerings, he said.

Data from research firm Information Resources Inc. show that volume sales of ready-to-eat cereals fell 1.9% in the 52 weeks ended Aug. 12 compared with a year earlier. While those data may have their limitations — they track U.S. supermarkets, drugstores, and mass-merchandise outlets but exclude Wal-Mart Stores Inc. — they show the tightrope food companies must walk as they look to offset commodity pressures with higher prices.

For the past 12 months, prices for cereal and cereal products were up about 3.8%, according to the Labor Department’s consumer-price index. According to the IRI data, Kellogg Co.’s ready-to-eat-cereal volume sales fell about 4% in the past 52 weeks. Kraft Foods Inc.’s Post cereals had a 1.2% decline, General Mills Inc. saw volumes climb 0.57%, while private-label companies experienced a 2.9% pullback.

General Mills, which makes Wheaties and Cheerios, said it was shrinking the size of some boxes as a way of increasing prices. The company’s price increases came later than those of many competitors. “We think the category is going to continue to grow in [the] low single-digit range. Cereal is a very staple and important part of consumers’ diets,” said Ken Powell of General Mills. Mr. Powell, former chief operating officer of General Mills, was named chief executive Monday, succeeding Steve Sanger.

The higher cereal prices follow a rise in costs for corn, wheat and other grains. Wheat futures are up about 69% for the year because of strong global demand, production issues in some parts of the world, and some farmers’ shifting to corn to tap the greater demand for ethanol.

The pressures food companies face range from high dairy costs to more-expensive sweeteners like high-fructose corn syrup. To add to food companies’ problems, crude prices have been on an upturn recently, adding to transportation costs. Separately, each of these commodities accounts for a fraction of the food companies’ costs, but their combined ascent has put pressure on packaged-food makers. “To a great extent the food companies have been able to protect margins, which means it is the consumer that is paying for this,” said D.A. Davidson analyst Tim Ramey.

While higher prices help reduce pressure on profit margins, consumers in some cases are being forced to buy less. Kraft said it saw overall volumes decline 0.7 percentage point in the second quarter due to pressures in its beverages, cheese and grocery units.

The beverage industry also has seen choppy volumes in the midst of price increases. Morgan Stanley analysts recently noted that carbonated-soft-drink industry volumes declined 7.5% in the four weeks ended Sept. 9 as prices moved up 6.4%, based on supermarket-scanner data.

Food companies also are trying to curtail their own costs and are hedging commodity prices to help their margins. “You can’t raise prices to the same extent that commodity prices are increasing — you will get push-back from the consumer and retail,” said Matt Arnold, an analyst at Edward Jones.

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By ANJALI CORDEIRO
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