Bloomberg News

Corn Price Gain Seen Prompting Higher Meat, Soda Costs

July 06, 2012

Corn Price Gain

Farmer Matt Wiggeim prepares a Hagie Manufacturing sprayer for road travel after applying insecticide on a soybean field outside of Walnut, Illinois. Photographer: Daniel Acker/Bloomberg

Corn prices near a nine-month high will mean higher costs for U.S. restaurants and foodmakers if the surge is sustained, hurting their efforts to lure budget- minded Americans.

Eateries including Popeyes Louisiana Kitchen and McDonald’s Corp. (MCD:US) may see higher meat costs, while cereal and beverage makers, such as General Mills Inc. (GIS:US) and Coca-Cola Co. (KO:US), may face elevated corn and sweetener prices. Consumer sentiment slumped to a six-month low in June, signaling companies will have a tough time passing along price increases.

“Corn is king, and corn is a commodity that drives every other commodity,” Alice LeBlanc, chief global supply chain officer at Popeyes, owned by AFC Enterprises Inc. (AFCE:US), said in an interview. “Unless we get some precipitation across the corn belt, the corn prices will stay high.”

Corn prices jumped to a nine-month high of $7.13 a bushel on the Chicago Board of Trade yesterday and have surged 37 percent since June 15 as a damaging drought plagued the U.S. Midwest. Today, corn futures for December delivery fell 2.2 percent to settle at $6.93 at 2 p.m. in Chicago amid speculation that cooler temperatures next week will stem yield losses.

The crop’s condition deteriorated for the fourth straight week as of July 1, with 48 percent of corn rated good or excellent, the worst for that date since 1988, the U.S. Department of Agriculture said July 2.

“We were all anticipating a wonderful, wonderful crop this year,” LeBlanc said. “It has kind of caught us a little bit by surprise.”

Corn, the biggest U.S. crop and worth $76.5 billion last year, is the main ingredient in chicken, cattle and hog feed. Atlanta-based AFC sells chicken wraps, sandwiches and chicken and sausage jambalaya at its restaurants.

Commodity Hedges

Restaurants and food sellers, which typically lock in commodities months in advance to protect against price spikes, may face higher food costs in 2013 if corn prices remain elevated. McDonald’s, which has recently promoted Spicy Chicken McBites, bought 727 million pounds of chicken and 800 million pounds of beef in the U.S. in 2010.

Meat, poultry and fish prices surged 7.4 percent last year and are expected to gain as much as 4.5 percent this year as rising corn prices make animal feed more expensive. U.S. retail beef prices, a composite that includes choice and other beef and hamburger values, climbed to a record $4.687 a pound in May, according to government data.

“The key question is just how hedged and protected these companies are,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. “The packaged-food companies would be the most impacted” by higher corn prices because fast- food chains are largely operated by franchise owners, who bear the increased commodity costs, he said.

Corn Syrup

Coca-Cola and PepsiCo Inc. (PEP:US) beverages use high-fructose corn syrup, while General Mills and Kellogg Co. (K:US), the maker of Corn Flakes and Pop Tarts, put corn starch and corn meal in cereals and granola bars.

Kent Landers, a spokesman for Atlanta-based Coca-Cola, and Kirstie Foster, a spokeswoman for Minneapolis-based General Mills, declined to comment. The cost of goods sold will rise 7 percent this year, mostly due to commodity inflation, at Battle Creek, Michigan-based Kellogg, Chief Financial Officer Ron Dissinger said during a conference call on April 26.

Jeff Dahncke, a spokesman for Purchase, New York-based PepsiCo, said the snack and drink maker uses forward buying to manage volatility and that no single commodity makes up more than 10 percent of the total. He declined to comment on PepsiCo’s specific strategy on corn prices.

Rebecca Hary, a spokeswoman for Oak Brook, Illinois-based McDonald’s declined to comment on commodities.

Price Increases

Food sellers may not be able to pass along those costs as price increases to their customers, according to Kenrick Jordan, senior economist at BMO Capital Markets in Toronto. Consumers are “pretty cautious about how they spend, and that affects food prices.”

If corn prices stay elevated, “the food manufacturers or food retailers would probably have to swallow some of the increased commodity costs,” Jordan said. Retail prices usually take six to 12 months to reflect the higher commodity costs, he said.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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Companies Mentioned

  • MCD
    (McDonald's Corp)
    • $96.27 USD
    • -1.28
    • -1.33%
  • GIS
    (General Mills Inc)
    • $52.95 USD
    • 0.09
    • 0.17%
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