It's not just cattle feeders and ethanol manufacturers who are feeling the pain from the recent sharp rise in crop prices. Top manufacturers of goods that line grocery store shelves and meat counters have also been reeling of late as their share prices slump on the back of the dramatic surge in key production inputs.
Pork giant Smithfield Foods, chicken producer Tyson Foods and breakfast food maker Kellogg Co have all suffered steep share price declines lately on worries that each firm will have trouble passing on the steeply higher input and ingredient costs to consumers amid the prevailing uncertain economy. But the alternative to raising prices is to reduce production, so corn bulls need to be on the lookout for demand erosion in corn among grocery store giants as well as at the more closely followed cattle feed yards and ethanol mills.
SHARE PRICE SORROWS
Getting accustomed to corn's recent rally - up more than 50 percent in six weeks - has proven to be tough for all corn market participants, but has been especially hard for large end-users of the commodity who have had to simultaneously manage a swoon in share price value as well.
As the graphic below shows, the share prices of Smithfield, Tyson and Kellogg's all turned lower in recent weeks just as corn prices took off to the upside on the back of fears that a drought across the Midwest will greatly reduce 2012 corn production. Soymeal prices followed a similar path to corn as the soybean crop also suffered in the heat, to further exacerbate input-price headaches for large feed and food ingredient buyers.
An interesting component to this crop price/share price relationship is that it is likely the steep elevation in deferred corn and soymeal prices - rather than the rally in spot prices - that caused most of the damage to meat and cereal producer equity markets, as those higher forward prices effectively wiped out good portions of next year's profit margins for the companies concerned. Furthermore, while most top-tier food processors actively hedge input requirements for the coming three to six months, few have the wherewithal to actively defend themselves against the kind of run-up seen in crop prices that are still more than 12 months out.
The end result has been a steep retreat in the share price of - and investor demand for - companies that are heavily reliant on the purchase of volatile commodities such as corn and soymeal while vying for price-sensitive consumer dollars in highly competitive grocery store aisles.