It was a fortunate coincidence for Premier Foods that 200 pig farmers and a porker named Winnie were demonstrating in Downing Street yesterday. The porcine message was plain: rocketing grain prices are sending feed costs soaring, making pig farming hopelessly uneconomic.

They are also hurting food manufacturers such as Premier, the maker of Hovis and Branston pickle, which yesterday halved its dividend, warned shareholders that profits would be hit and revealed that it had had to go cap in hand for more money from its bankers.

Premier, no slouch when it comes to blaming outside forces for its problems, has seized on the rising price of wheat and other primary products and rising packaging costs to explain its latest predicament.

Certainly, it has suffered steep rises in its input bills. The wheat component in a 115p loaf has doubled to 16p. Annualised the extra costs come to £225 million. But rivals are facing the same pressures and their customers, the main supermarkets, are not entirely unsympathetic. Premier has been able to pass on £190 million of those extra costs in the form of higher prices and is confident of fully recovering the rest in the next few weeks. The cost of the time lag, a one-off £10 million hit to profits, should hardly be terminal.

The inconvenient fact is that Premier's problems are not so much about wheat, but about debt, a commodity it has in all too plentiful supply. The company has just renegotiated extra headroom to allow it to borrow £2.1 billion.

Premier may be a listed company but its balance sheet owes more to the world of private equity. If it succeeds in rejuvenating the trolleyful of brands it has acquired at very full prices over the past two years, the returns will be spectacular because of the high gearing.

But leverage is a two-edged sword. Any operational difficulties and the company will struggle to pay its annual interest bill, which is £150 million and rising. Premier's chief executive, Robert Schofield, was cheered when he structured the yeasty balance sheet 18 months ago. But attitudes to debt and risk have changed. Premier shares have plunged by two thirds in a year.

Shareholders were taking comfort yesterday from vote of confidence from Royal Bank of Scotland and other banks committing to lend Premier even more, albeit at higher interest rates. But when a client owes banks billions, lending it a bit more is sometimes the lesser of two evils. It does not necessarily mean the borrower's prospects are glowing.

Premier was created in a very different pre-credit crunch era. Cash is now tight, and it will be hoping that cutbacks in promotional spending will not tip it into a vicious spiral of falling sales and further spending cuts.

patrick.hosking@thetimes.co.uk

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