Christmas is coming and food producers are getting fat. At least in stock market terms, where the defensive appeal of investing in recession-proof consumer staples means that the sector has swollen in size relative to a wasting FTSE all-share.

Evidence of its corpulence abounds. Food producers account for more than 12 per cent of the European stock market, double their weight at the end of the last decade and back to their bulk of the early 1990s recession. Last month’s Merrill Lynch Fund Manager Survey found that professional investors had tilted their portfolios towards food in October for the first time in five years. That phenomenon – the City equivalent of comfort eating – also helps to explain the sector’s unprecedented outperformance: up 50 per cent against the wider stock market since the start of July.

Elsewhere, Tate & Lyle, the corn syrup maker, and Cranswick, the sausage producer, stand a good chance of regaining their respective slots in the FTSE 100 and FTSE 250 indices in next week’s quarterly reshuffle.

Not that the sector is without casualties. Shares in Premier Foods, the owner of Hovis and Mr Kipling, have fallen more than 90 per cent year-on-year, dragged down by a £1.8 billion debt burden that has forced the company into waiving its bank covenants and cancelling its interim dividend. Milk producers have also struggled, with Dairy Crest and Robert Wiseman Dairies giving warning on profits last month amid commodity price volatility. Further down the scale, Uniq, the chilled foods maker once known as Unigate, has seen its stock market value collapse to only £6 million amid concerns that the fragility of its balance sheet will hinder its ability to win and retain grocery customers.

Yet as the year draws to a close, the question is whether the sector’s outperformance can be maintained. The short-term concern is whether food producers can continue to increase profits and dividends in a severe economic downturn. The longer-term worry – perhaps too distant to warrant serious consideration – is whether defensives as a whole are vulnerable to profit-taking by fund managers in search of cyclical stocks that are strongly geared to recovery.

If there are reasons to hold on, they have less to do with the ability of food producers to withstand tougher times – whether from consumers trading down to cheaper own-label products in developing markets, or slower growth in emerging ones – than the boost they are set to receive from elsewhere: specifically, from currencies and commodity prices.

First, as Bernstein, the American stockbroker, points out, adverse foreign exchange movements have hurt the sector’s profits in six of the past seven years. But in the last quarter of 2008, and in 2009, currencies are working in its favour. Should sterling remain at present levels, for example, next year’s US dollar revenues will be on average 19 per cent higher than in 2008.

For euro-denominated sales, the translation benefit is a more modest – but still welcome – 7 per cent. With Unilever and Cadbury each drawing about 20 per cent of turnover from North America, Bernstein calculates that next year’s earnings will be bolstered by 3 per cent and 5 per cent respectively.

Secondly, as the chart below shows, slowing global demand has caused a collapse in agricultural commodity prices since the summer, from which food producers should benefit through cost deflation in raw materials. Falling oil prices will also have helped their packaging and distribution costs. There are caveats. Most commodities are priced in US dollars, so some of the impact of cost deflation is offset by currency appreciation, which makes ingredients more expensive in sterling terms.

The effects are also uneven. Cadbury, for example, is highly exposed to cocoa prices, which have remained relatively resilient amid fears for the quality of this year’s crop. In October, for example, Cadbury cautioned that raw material cost inflation will accelerate to between 6 per cent and 8 per cent next year.

But there must also be a suspicion that some food producers are downplaying the extent of deflation in their public utterances on costs to avoid pressure from customers to cut prices. Danone, the French group, recently commented that it expects next year’s costs to remain flat on 2008, which Citigroup thinks is too conservative. Even so, with commodity prices lower, companies should have greater scope to fund spending on product innovation and promotional activity (advertising campaigns and supermarket special offers) to counteract any recession-related weakening of sales.

Two final thoughts. First, volumes from emerging markets should continue to grow on the simple assumption that branded consumer staples are still underrepresented in these territories. Secondly, the dividend-paying abilities of cash-generative food producers makes them a relatively more coveted corner of the stock market at a time when payouts from other sectors are falling – or, in the case of banks, being halted altogether.

All of which suggests that, while food producers’ shares may struggle to match their recent run, the fat years are far from over.

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