Hostess went bust. Big Union rejecting pay cuts was the last straw but not what was hurting the company so much. Rising corn and wheat prices, a main Hostess ingredient, hurt the company’s financials along with a semi-stagnant brand and Big Union labor costs.
From the International Food Policy Research Institute’s website:
Although the food price spikes of 2008 and 2011 did not reach the heights of the 1970s, price volatility—the amplitude of price movements over a particular period of time—has been at its highest level in the past 50 years. This volatility has affected wheat and maize prices in particular.
Apart from these effects of high food prices, price volatility also has significant effects on food producers and consumers. Greater price volatility can lead to greater potential losses for producers because it implies price changes that are larger and faster than what producers can adjust to.
Several things have contributed to higher food prices. In the U.S. a big reason is “bio-fuel” which is ethanol being added to gasoline to make the supply “last longer.” By diverting crops to Government subsidized automotive fuel, less is available for human and animal consumption, thereby raising prices. Third World countries who rely on America’s food pay more as do domestic consumers and companies like Hostess.
Rising prices of grain squeeze the profit margin, especially when your Big Union workforce refuses pay cuts.
The Federal Reserve has been flooding the markets with U.S. currency and buying American debt. This policy has created inflationary pressures since there is more money out there that was created from nothing. Inflation cuts the buying power of everybody, causing prices to rise and, for companies, hurting profits.
When the Fed’s chairman, Ben Bernanke, was asked about being responsible for rising food prices, he denied it:
Bernanke said that factors other than food prices may be playing a role in the protests in Egypt and elsewhere, and that global food prices are rising mainly because of trends in emerging markets.
“We have essentially a two-speed recovery” in the global economy, Bernanke said. The US and other advanced economies are recovering from recession slowly, while nations such as China and Brazil are growing faster.
Those emerging economies, and the richer diets that go along with rising prosperity, are driving the rise in food prices, Bernanke said. He called it “entirely unfair” to blame the Fed’s loose monetary policy, including the recent program of Fed bond purchases known as QE2.
Would the Fed’s chairman take the blame for rising food prices?
Of course not.
But here is the main squeeze that was put on Hostess:
So who is responsible for Hostess going bust? Blame reliance on their old products like Twinkies, Ho Hos, and Wonder Bread without expanding their product base, rising food costs due to negligent fiscal policy, and Big Union intransigence.
A company might survive one or two but not all three.