John Dieser from Thomson Reuters' Corporate Advisory Services group discusses corn.
Transcript:
Corn is the most widely produced feed grain in the United States, accounting for more than 90% of total production. Used in everything from tortillas to whiskey, corn is the number one food ingredient, and consumers are paying the price of higher corn costs. The U.S. produces more corn on an annual basis than the rest of world's top ten corn producers combined. Estimates for 2008 show that 86 million acres in the US are set to harvest corn. So why are corn prices skyrocketing?
I am John Dieser for Corporate Advisory Insight to discuss this topic.
Not only is corn a staple in food production, but it is also a commodity that is being diverted to create ethanol fuel. The ethanol sector has grown substantially from a cottage industry to a hearty source of renewable fuels. With this growth comes a tremendous increase in demand for corn. Ethanol represents a significant market for U.S. corn, consuming more than 2.3 billion bushels in 2007 to produce 6.5 billion gallons of renewable fuel. In addition, flood waters in the Midwest have either destroyed or delayed millions of acres of corn, causing a ramp-up in world food prices. Farm and business losses due to the flooding are expected to be in the billions of dollars. The U.S. Department of Agriculture estimated that 43% of this year's crop is in fair to very poor condition. These factors account in part for the increase in corn, wheat and soybean prices that we've seen recently, just to name a few. Over the past several weeks, corn futures have reached upwards of $7.30/bushel. Compare this to 2005, when corn prices averaged $2.52/bushel. Also, due to a shift towards planting more corn acreage by farmers in order to reap the benefits of the escalating corn prices, supply/demand methodology would predict falling corn prices and increasing soybean prices. Unfortunately, only the latter is true as corn supply continues to be used up for ethanol production, while the decreasing acreage devoted towards soybeans is now driving prices up as well. Soybeans futures are now up almost 200% in the last 5 years.
How important is the price of corn to the overall economy?
As corn prices rise, agricultural companies stand to benefit as their corn or corn seeds command a higher price on the market. Archer Daniels Midland (ADM) and Bunge (BG) are examples of growers of that are benefiting from the bull market in corn. Their products reap a higher price on the market. Similarly, Monsanto (MON) and DuPont (DD) produce genetically engineered seed specifically targeted towards ethanol production. In an environment such as the current one, these products fetch a premium. Conversely, companies who buy corn or derivative products can be hurt considerably by higher prices. Hormel Foods (HRL) and Tyson Foods (TSN) are examples of food products companies that are hurt as prices rise because higher corn prices equate to higher feed costs for livestock. Coca-Cola (K) and Pepsico (PEP) also get squeezed as corn is a main ingredient in syrup for soda and various snacks. These companies don't absorb all of that cost themselves, though - much of it is passed on to the consumer.
Consumer food prices have been rising at a 6.3% seasonally adjusted annual rate this year. Earlier in the decade, food prices rose at an average 2.5% annual rate. What does this mean? When there are cost shocks in the food production system due to changes in the commodity or farm product market, most retailers respond by passing on a fraction of their higher costs to consumers. An increase in the price for meat, poultry, eggs, milk, fresh fruit, and fresh vegetables is one consequence that we have seen. While higher corn prices are helping some, many companies and most consumers are paying dearly, and the economy is struggling to stay afloat.
So it seems that corn is in fact affecting our daily lives.
I am John Dieser and this is Corporate Advisory Insight.
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