Economy

CO₂: shortage is taking fizz out of US food and drinks makers

US food and beverage producers have largely held their ground so far this year. Despite soaring input costs, many have been able to pass on higher prices to consumers. The S&P Consumer Staples Index has lost only 8 per cent in 2022, compared with a 22 per cent drop for the S&P 500. Some like Coca-Cola have even managed to eke out a gain.

But a looming carbon dioxide shortage in the US could leave the industry feeling flat. Its applications include putting the fizz in soft drinks and beer, stunning animals before slaughter, and packaging food. A lack of CO₂ — or having to pay more for it — will add to companies’ growing bills. These already include higher prices for energy, labour and transport.

The situation in the US mirrors the one in Europe. Most CO₂ is a byproduct of other industrial processes. In Europe, that is usually fertiliser production. The surge in natural gas prices in Europe following Russia’s invasion of Ukraine has prompted companies that make fertiliser to cut back.

In the US, CO₂ is also a byproduct of ethanol output. This has fallen as Americans have cut back on driving. Natural contamination at the Jackson Dome — a Mississippi reservoir of CO₂ from an extinct volcano — has added to the supply strain earlier this summer.

The US producer price index for carbon dioxide has risen nearly 25 per cent since April to a new high. Companies including Tyson and Kraft Heinz have been racing to secure supplies.

It is not just higher prices. Food and drinks companies may have to cut back on production, resulting in lost sales. In Italy, leading mineral water companies, including the Sanpellegrino unit of Nestlé, have reduced production due to a CO₂ shortage.

Since the start of the year, a valuation gap has opened up between the Consumer Staples index and the broader S&P 500 index. The industry’s ability to deal with supply chain and cost inflation issues will be key to sustaining investor appetite for the sector.

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