General Mills sees higher food costs next year

NEW YORK (Reuters) - General Mills Inc , the maker of Cheerios cereal and Progresso soup, said on Wednesday it expects commodities inflation to gather speed.

Its shares fell 2 percent in premarket trading.

General Mills also reported a higher quarterly profit that was in line with Wall Street forecasts, supported by a surge in international sales.

General Mills, like its peers in the U.S. food industry, is being squeezed by higher costs for ingredients such as grains, meat and dairy.

General Mills has forecast a 4 percent to 5 percent rise in costs this fiscal year, due to higher prices for fuel, dairy, resin-based packaging, cocoa and wheat, and it expects inflation for those types of items to be even higher in its next fiscal year, which ends in May 2012.

Still, the company has been one of the best in the industry at coping with rising commodity costs by steadfastly reducing expenses and introducing new products that command a higher price.

"They have a lot weapons in their arsenal to try to offset that beyond raising prices, but they're not immune," Morningstar analyst Erin Lash said.

Chief Executive Ken Powell said in a statement that the current quarter would see the highest profit growth of the year as rising costs are partially offset by higher prices.

Most companies are raising prices to counter some of the inflation, but that could hurt revenue if cost-conscious shoppers turn to cheaper brands.

Net income in the third quarter that ended February 27, was $392.1 million, or 59 cents per share compared with $332.5 million, or 48 cents per share, a year earlier.

Excluding the effect of mark-to-market on its commodity hedging positions, General Mills earned 56 cents, in line with Wall Street estimates.

Overall sales during the third quarter rose 1.6 percent to $3.65 billion, just less than the $3.69 billion Wall Street analysts were forecasting, according to Thomson Reuters I/B/E/S.

Its sales in U.S. stores, which account for nearly 70 percent of revenue, were down 1 percent as cereal purchases fell 6 percent, although General Mills sold roughly the same amount of food over all.

Profits from U.S. retail sales fell in part because of higher commodity costs.

In contrast, General Mills saw an 8 percent sales gain in Europe and Asia, which make up nearly one-fifth of its business, and sold 6 percent more food in those regions.

The company, which also sells Green Giant vegetables and Haagen-Dazs ice cream, stood by its fiscal 2011 forecast, given last month, of adjusted earnings of $2.46 to $2.48 per share on net sales growth at a low single-digit percentage rate.

(Reporting by Phil Wahba, additional reporting by Martinne Geller, Editing by Maureen Bavdek)