High Corn Prices Will Impact Bottom Lines

| June 30, 2008 | 0 Comments

This Friday’s the Fourth of July, and the markets are closed.  As the most American of holidays, it’s celebrated with fireworks and barbecues around the nation.  This is the biggest holiday of the summer, as it should be.  We’re celebrating the independence of our great nation.

What are you doing?

This Fourth of July I’ll be at my brother’s house.  He’s hosting a traditional barbeque and pool party for a huge group of people.  My brother and his wife just finished landscaping their back yard.  To say it’s amazing is an understatement.  They’ve got a huge pool which is perfect for cooling off in the heat of the summer.  The separate play area for the kids has a sand box and jungle gym.

But the highlight of the yard is the barbecue station.

It’s strategically placed in the center of the yard.  This makes it the ideal focus for parties and events.  Everyone naturally gravitates towards all of the activity.  In addition to a huge propane powered grill, he’s got a strategically placed cooler built into the counter top.  It’s perfect for beer and other adult beverages.

This isn’t a grill, it’s the command center for the party.

At events like this food’s never a problem.  The spread will be fantastic. I’m sure they’ll have burgers and dogs, steaks, chicken, and an assortment of sausages.  Sides of potato and macaroni salad, fresh fruit. . . . my mouth is watering just writing about it.

But this year I imagine one big item will be missing.

Corn on the cob.  I love a good ear of corn cooked on the grill.  That smoky flavor is wonderful dripping in sweet butter and just a touch of salt.  Unfortunately this year corn prices are though the roof.  For the last few months they’ve been climbing ever higher . . . and today’s news didn’t help much.

All of the talk about corn gave me an idea.  Everyone’s focusing on how to make money from increasing agricultural prices – corn included.  Now I could go on and on about companies that’ll benefit from high prices. Archer Daniels Midland (ADM) and Monsanto (MOT) will sell more corn seed.  Potash (POT) and Agrium (AGR) will sell more fertilizers to grow the crops.  Even Deere & Co (DE) will benefit from making all the equipment needed to be a modern day farmer.

Instead, I’m going to talk about companies who’ll suffer from high corn prices.  But first, here’s some important information from today’s news.

In case you didn’t see it, the US Department of Agriculture released their crop report.  Original estimates indicated 93.6 million acres of corn were going to be planted this season.  But that was before the rains and the flooding.  The rains prevented many farmers from getting the corn crop in the ground.  Other farmers found their fields destroyed by flooding.  After taking a survey of the damage the USDA expects the US corn harvest to be a paltry 87.3 million acres.

The loss of 6.3 million acres doesn’t sound like a lot, but it’s devastating for heavy users of corn.

See, corn prices didn’t spike on the news, but they didn’t fall hard either. This means that the supply and demand levels are relatively balanced. Good news for farmers who’ll be selling their crop for more than $7 a bushel.  Bad news for users of corn who hoped additional supply from farmers would lower prices.

The other side of the coin.

The majority of corn produced is used in three different ways.  First is Ethanol.  Now, I’m not going to jump into the discussion on if it’s good or bad for the environment – or our energy policy.  What I will say is that ethanol will consume between 20% and 30% of the crop produced. Ethanol is made by fermenting the sugar in the corn into ethanol.

As corn prices increase the cost to produce ethanol will increase as well. This isn’t good for companies like Verasun (VSE).  They’ll struggle to sell ethanol at profitable levels.

Sweet, sweet corn syrup.

Another major use of the corn is for the production of High Fructose Corn Syrup.  Despite its bad rap for contributing to obesity in America, it’s a widely used product.  Corn syrup is a natural replacement for sugars and other sweeteners.  It’s used extensively in the production of soda and other packaged products.  Companies like Coca-Cola (KO) and Kraft Foods (KFT) use massive amounts of the stuff in their products.

With the cost of corn syrup increasing they’ll face a dilemma.  Absorb the higher costs and reduce their profits, or raise prices and risk losing market share.

Cows, pigs, and chickens

The last group of companies are also the largest consumers of corn in the nation.  They feed corn to their chickens, pigs, and cattle to grow the animals.  Companies like Tyson (TSN), Pilgrim’s Pride (PPC), and Smithfield Foods (SFD) all sell animal proteins to US consumers.  The end product is essentially made from corn.

All of these companies are going to find it difficult to cope with increasing prices.  This will impact their revenue and profit levels.  They’re going to struggle, and I wouldn’t be surprised to see one or more of them miss their estimates.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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