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Grocery wholesale price growth outpaces on-shelf prices again in February

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

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Grocery wholesale price growth outpaces on-shelf prices again in February

Grocers paid higher prices for produce and beef in February, marking the third straight month in which year-over-year wholesale food prices increased at a faster rate than retail prices.

The "final demand food" category of the producer price index, or PPI, rose 1.6% from the same month one year ago, according to the Bureau of Labor Statistics, or BLS. The subindex represents the wholesale prices that grocers and other retailers pay for food items.

Over the same period, the "food at home" segment of the consumer price index, or CPI, advanced 1.2%. The subindex represents the average prices that shoppers in the U.S. pay for food at retailers.

Analysts who cover the grocery industry use the difference between the two measures to determine the state of grocers' profit margins, subtracting the growth rate of the PPI from the growth rate of the CPI. When the result is negative, grocers' margins are more likely to narrow.

In February, the difference was negative by 0.4 percentage point, narrower than the gap between the metrics in December 2018 and January.

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Wholesale food prices have been growing at a faster clip than retail prices in recent months, marking a change from most of the second half of 2018, when retail prices rose faster. When the difference between retail price growth and wholesale prices is positive, grocers could see their margins expand.

Increases in prices for fresh and dry vegetables, grains as well as beef and veal helped lead the final demand food subindex higher year over year in February. Price declines for eggs for fresh use, oilseeds as well as shortening and cooking oils weighed on wholesale prices.

Consumer prices for nonalcoholic beverages and beverage materials rose 2.8%, while prices for fruits and vegetables advanced 2%. The subindex for cereals and bakery products increased 1.8%; meats, poultry, fish and eggs rose 0.6%; and dairy and related products gained 0.1%.

Other food at home items' prices collectively rose 0.5%.

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M&A activity

Notable deals in the food industry during the month to March 13 included online grocer Ocado Group PLC's joint venture with brick-and-mortar counterpart Marks and Spencer Group PLC, announced Feb. 27. The deal between grocers, both of which are based in the U.K., is worth about $997.98 billion, according to S&P Global Market Intelligence.

Beverage and snack giant PepsiCo Inc. agreed to acquire sports nutrition brand CytoSport from Hormel Foods Corp. Hormel said Feb. 19. The deal is worth about $465 million, according to Market Intelligence.

The following day, Canadian maker of cannabis products Tilray Inc. closed its $318.5 million purchase of Fresh Hemp Foods Ltd., which does business as Manitoba Harvest, according to Market Intelligence. Manitoba Harvest's products include hemp-infused protein powders, oils and hemp seeds.

The month also included Campbell Soup Co.'s sale of Garden Fresh Salsa Co. to Aliments Fontaine Santé Inc. The companies, which announced the deal Feb. 26, did not disclose the value of the transaction.

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Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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