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High corn prices are creating misery for meat processing companies that are getting squeezed on profits and consumers who are getting squeezed in their wallets.
Just about the only group to benefit from high corn prices will be agribusiness companies that make the equipment and supplies farmers will need to grow more corn.
Persistently high corn prices have put the pork, beef and poultry industries under tremendous pressure. Companies like Pilgrim's Pride Corp. (NYSE: PPC), Smithfield Foods Inc. (NYSE: SFD), Hormel Foods Corp. (NYSE: HOR) and Archer Daniels Midland Co. (NYSE: ADM) unable to pass on the full price increases to customers.
And with demand for corn growing at a pace faster than farmers can match, there's no relief in sight. Corn harvests fell short of demand by 5.8% for the year ending in August, and analysts don't expect much improvement next year.
In fact, the U.S. Department of Agriculture (USDA) expects America's corn stockpiles to hit a 16-year low for the 2011-2012 marketing year.
"Last year, corn and soybean crop harvests were not adequate to fulfill the needs for ethanol, for feed and for export," Bill Roenigk, vice president of the National Chicken Council, told Gannett. "It's been difficult, if not impossible, to pass on those higher feed costs to the consumer."
And yet consumers have still struggled with food costs inflated by high corn prices. According to the USDA, beef prices were up 10.1% in September from a year earlier, pork prices up 7.5% and poultry up 3%. The price of eggs zoomed 6% in September alone.
Why Corn Prices Are High
Several factors are at work keeping corn prices high.
On the supply side of the equation, the corn crop in the United States - the world's leading corn grower - got slammed by floods and drought earlier this year. This resulted in the USDA lowering its forecast for the 2011 harvest three consecutive months to about 12.433 billion bushels, similar to last year's.
Meanwhile, demand for corn has never been greater. Production of fuel additive ethanol, for example, now consumes 40% of the U.S. corn crop.
And global demand for corn is rising rapidly in emerging nations, particularly China. Morgan Stanley (NYSE: MS) estimates that China will quadruple its imports of corn to 4 million tons this year, and further increase to 9.4 million tons by 2014.
Such forces have been driving corn prices up since 2007, when corn traded for about $3 per bushel. After spiking to nearly $8 a bushel earlier this year, corn prices fell below $6 in September, but recently climbed back up to the $6.50 range. Most analysts expect it to stay above $6 for at least the next year or so.
Poultry Industry Gets Plucked
Although the beef and pork processors have taken some profit hits, the poultry industry has been hit the hardest. Years of emphasizing high-yielding "factory farming" have resulted in an oversupply of chickens, keeping prices low even as production costs have risen.
"Poultry feed ... is up about 20% compared to this time a year ago," Roenigk said. "Another way to look at it is in September of 2008, it cost 25 cents to produce a live pound of chicken, and today it costs 45 cents. That's an 80% increase in the cost over three years."
The deadly combination of depressed prices and high costs has forced three poultry companies into bankruptcy over the past year, the most recent being Cagle's Inc. (AMEX: CGL.A).
"There's too much white meat production relative to demand. Poultry producers are still under financial pressure," analyst Karl Skold of Westside Economics told Dairyherd.com.
While many companies will continue to struggle with high corn prices (and those are companies to keep out of your portfolio) a few do stand to benefit. Those high prices will encourage more farmers both in the United States and around the world to invest in ways to increase their corn crops.
Some investment ideas to consider include:
- Farmland: "Farmland is a theoretically safe, income-producing, inflation-protected hedge," said former Morgan Stanley strategist Barton Biggs, who now runs a hedge fund forTraxis Partners LP, toldCNBC. Biggs said it has historically provided a "rock-steady return" that he estimated at 6% to 7% annually. If you're unable or unwilling to buy farmland, there's an exchange-traded fund (ETF), the Market Vectors Agribusiness Fund (NYSE:MOO), comprised of many agribusiness companies with large holdings of farmland.
- Agribusiness Equipment and Supply Companies: Deere & Co. (NYSE:DE), Caterpillar Inc. (NYSE: CAT), Potash Corp. of Saskatchewan Inc.(NYSE:POT) and Monsanto Co. (NYSE:MON) will all benefit from farmers' attempts to meet rising corn demand. Deere and Caterpillar manufacture farming equipment. Potash Corp.is the world's largest fertilizer company by capacity. And Monsanto is a world leader in seed technology and agricultural research on increasing crop yields.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.