Food Verses Fuel, how does it affect Company Valuations

Implications: 1.  The demand curve for Grains in the world is shifting to the right.  How much we do not know.  The market has not found a place where usage is rationed.

2.  Many CPG food companies will suffer in the short term while Big Box Retailers hold the line on price increases.

3.  We as consumers can count on food "inflation" in the next year and as long as the market has to search for a rationing price level.

Analysis: 1.  Even with the recent narrowing of margins in the Ethanol and BioDiesel industries, the best margin use for grains today still is in the BioFuel industry.

2.  Those firms feeding Grain Consuming Animal Units (Cattle, Pork, Poultry and to a lesser extent fish) are facing reduced margins as they continue to pay comparatively high prices for their largest input Carbohydrate feed (corn) compared to last year.

3.  The spill over effect from high corn prices will be/is high prices for other carbohydrate grain sources like Wheat.

4.  The world is relying on historical increases in planted acres on U.S. and world farms with well above average yields just to satisfy the current demand level at current prices.

5.  If pricing is hard to get on the retail shelf, even good brand names will see margin shrink which will lead to "disappointment" on quarterly earnings releases.  I would suggest that firms like Smithfield Foods, Tyson and the like will struggle as they sell a lot of product that is non branded and thus will find it difficult to get price increases to the consumer.  As well, those firms that concentrate or have a lot of exposure in the world of private label manufacturing will see margin erosion.  To make one pound of Beef takes about 8 pounds of feed.  Corn prices this year are up nearly 2X from last year.  Can private label Beef producers get enough price increase from the Big Box Retailer to cover the cost increases implied above?

6.  Very fine brands like Coke and Pepsi may even gain in this high commodity input cost environment.  The cost of the commodity input Fructose (corn syrup used to sweeten beverages) is small compared to the sales price of the product.  As the world realizes there will be food inflation, these fine brands will have more pricing power and perhaps even gain margins during this high input price challenge.  A significant corn price increase represents only a few cents per case increase in the cost of beverages.

7. In the end, the world will look to other sources of energy besides that coming from Corn/grain.  Millions of research dollars are moving to solve the Cellulosic ethanol riddle.  That will likely take another five years, but at current high Crude Oil prices which can be hedged many years in the future, that will likely happen.  We can also expect other new energy ideas as long as Crude remains at or above current levels.

8.  Mr Cromarty mentions the emerging nations and their increased needs for food.  The cheap dollar does allow those nations to buy inputs for their food/fuel industry relatively cheaper than the U.S. domestic industry.  The fact that China and India and other countries economies are sponsoring a huge emerging middle class that will increase meat and vegoil in their diets is not to be over looked.  As well, those emerging nations continue to increase their use of cars and industry which demands more fuel. 

9.  The job of the market is to find a price level that will ration demand.  That then will allow us Economists to get a better handle on the new Demand Curve.

10.  Other companies that will likely struggle during these near term high commodity prices will be IBC, Lance, Tasty Baking and other firms that have a large exposure to private label products sold in the Big Box Retailers.