Kraft 2006 Annual Report Download - page 12

demand for coffee products. In 2006, coffee bean costs on average were higher than in 2005. A significant cost item in chocolate confectionery products is cocoa,
which is purchased on world markets, and the price of which is affected by the quality and availability of supply and changes in the value of the British pound
sterling and the United States dollar relative to certain other currencies. In 2006, cocoa bean and cocoa butter costs on average were lower as compared to 2005.
During 2006, aggregate commodity costs continued to rise for the Company, with significant impacts resulting from higher energy, packaging and coffee
costs, partially offset by lower cheese and meat costs. For 2006, the Company's commodity costs were approximately $275 million higher than 2005, following
an increase of approximately $800 million for 2005 compared with 2004. The Company expects the higher cost environment to continue, particularly for energy
and packaging.
The prices paid for raw materials and agricultural materials used in the products of Kraft North America Commercial and Kraft International Commercial
generally reflect external factors such as weather conditions, commodity market fluctuations, currency fluctuations and the effects of governmental agricultural
programs. Although the prices of the principal raw materials can be expected to fluctuate as a result of these factors, the Company believes such raw materials to
be in adequate supply and generally available from numerous sources. The Company uses hedging techniques to minimize the impact of price fluctuations in its
principal raw materials. However, it does not fully hedge against changes in commodity prices and these strategies may not protect the Company or its
subsidiaries from increases in specific raw material costs.
Regulation
All of Kraft North America Commercial's United States food products and packaging materials are subject to regulations administered by the Food and
Drug Administration ("FDA") or, with respect to products containing meat and poultry, the Food Safety and Inspection Service of the United States Department
of Agriculture. Among other things, these agencies enforce statutory prohibitions against misbranded and adulterated foods, establish safety standards for food
processing, establish ingredients and manufacturing procedures for certain foods, establish standards of identity for certain foods, determine the safety of food
additives and establish labeling standards and nutrition labeling requirements for food products.
In addition, states enforce food laws, such as regulating the business of Kraft North America Commercial's operating units by licensing plants, enforcing
federal and state standards of identity for selected food products, grading food products, inspecting plants, regulating certain trade practices in connection with
the sale of dairy products and imposing their own labeling requirements on food products.
Many of the food commodities on which Kraft North America Commercial's United States businesses rely are subject to governmental agricultural
programs. These programs have substantial effects on prices and supplies and are subject to Congressional and administrative review.
Almost all of the activities of the Company's food operations outside of the United States are subject to local and national regulations similar to those
applicable to Kraft North America Commercial's United States businesses and, in some cases, international regulatory provisions, such as those of the European
Union regarding labeling, packaging, food content, pricing, marketing and advertising and related areas.
The European Union and certain individual countries require that food products containing genetically modified organisms or classes of ingredients derived
from them be labeled accordingly. Other countries may adopt similar regulations. The FDA has concluded that there is no basis for similar mandatory labeling
under current United States law.
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Source: KRAFT FOODS INC, 10-K, March 01, 2007