You don’t only eat corn when you eat corn. It is an important input for milk, meat, packaged foods, soda, even gasoline. And a drought has severely compromised this year’s US crop, threatening to send prices to new highs. Corn prices have surged from $6 a bushel in June to more than $8 now.
That is a big deal for a many companies. Most hedge exposure. Ethanol companies (which absorb 40 per cent of the total crop) can buy corn futures and sell them on ethanol or gasoline or contract for corn and ethanol in advance, locking in a certain amount of profit. They can also idle plants, as Valerohas. Meat producers (another third or more of the harvest) can lock in feed prices too. Chicken producer Sanderson Farmstypically buys feed only a few months in advance, in case prices go against it But as there is no futures market in chicken, it is harder to guarantee a margin.
The stakes are high. Sanderson reckons every 10 cent jump in the price of corn raises the cost of producing a pound of chicken by about a third of a penny. A $2 increase, like the one that just took place, adds about 7 cents to the cost per pound. Doesn’t sound like much? Well, Sanderson’s gross profit per pound in the second quarter, which ended in April, was about 8 cents (a 10 per cent margin). If corn prices stay high after the hedges roll off, and consumers resist increases, it will hurt. Sanderson’s shares fell by a fourth in the past three months. Fellow protein makers Smithfield, Tysonand JBS are beaten up also.