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Future for Food Industry Futures
While the 2012 drought may be old news to many, its impact continues to affect countless companies within the food and agribusiness industry. There are, in fact, several sectors of the food industry that could remain in distress in 2013 and 2014 as a result. But before we look too far ahead, it is purposeful to first take a look back for greater perspective on what may be to come.
The most immediate impact of last year’s drought was a dramatic increase in grain prices (corn, soybean and wheat). Corn is the most popular grain crop and the best one to use as a proxy. Corn prices ended 2011 around $5.80 per bushel but as a result of the drought they increased over 31% peaking around $7.60 per bushel. While the price has since abated in anticipation of normal rainfall in 2013, it still remains around $6.50, or 12% above 2011 ending levels.
Moreover, grain prices had been increasing for the 3 years prior to the drought, as a result of increased demand for protein foods (requiring vast amounts of grain as feed) out of China. Looking back 3 years to April 2010, corn prices were $3.40 per bushel, or about 50% of today’s levels.
If you are feeding cattle, hogs or chickens, your input costs have increased nearly 100% during the past three years – an incredibly onerous amount. Consequently, we saw a larger number of bankruptcies during 2012 in the protein sector, especially in dairy farms and hog farms. Managers in this struggling area had to cull or liquidate herds, resulting in lower cattle and hog prices during the second half of 2012. So, while you might expect meat prices to rise during a drought, they actually dropped; however, that trend is poised to reverse dramatically..
In fact, in 2013, the supply of cattle and hogs is down because of last year’s herd liquidations and cattle prices are already increasing. From the bottom in July 2012, feeder cattle prices have risen 13%, while hogs still remain near their 2012 lows. However, we expect this increase to be even more dramatic later in the year as more meat processing plants struggle with the slow supply of animals. This lack of supply could lead to distress in both the meat processing industry, as well as the restaurant and food service industries that rely on reasonable meat prices.
Another area that we are looking at for signs of trouble is the private label food processing companies which rely on grains and corn byproducts, such as corn syrup. These companies make everything from bread to candy for the supermarket chains. While most of these companies were contracted at lower prices for 2012, their 2013 costs will rise to spot market prices. As we already mentioned, the price of corn has increased 100% over a 3-year period and yet these companies are not able to pass along all of that increase to customers. The oligopoly in the grocery industry leads to very little pricing power for most private label food suppliers. We expect to see more distress in this specific sector during 2013.
Finally, anyone that is hedging large volumes of grains during the first half of 2013 could suffer some wide swings this year. The US Agriculture Department is expecting a bumper corn crop in 2013 as a result of the high price of corn. If that occurs, it is unclear where the new floor for corn prices will shake out. Will it drop back to the $5.50 range where it spent much of 2011 (pre-drought levels), or will it swing much lower into the $4.50 range? If you are a company holding corn or corn futures at higher prices, you could suffer losses if the price drops more than expected. Of course, the US could suffer a second year of low rainfall that would result in more pain for many of the same sectors suffering in 2012.
Whichever way grain prices move during 2013, it is certainly shaping up to be a volatile year, requiring expert navigation by company managers.