Analysis: Corn spike may pressure meat, drink makers

By Martinne Geller

NEW YORK (BestGrowthStock) – Consumers could pay more for a steak sandwich and a soda in the next few months as food and beverage companies cope with a spike in corn prices.

But manufacturers and grocers may have to digest some of the costs before shoppers swallow them.

“Something has to give. Somebody has to win and somebody has to lose — between the consumer, the grocers and the consumer packaged goods firms,” said Morningstar analyst Philip Gorham. “I really don’t think the CPG firms are going to be able to raise prices to cover their cost increases … I think at least in the short term, they’ll have to swallow some of that price increase.”

U.S. corn futures rose nearly 19 percent over the last four trading sessions in the aftermath of the U.S. government report issued on Friday that slashed corn and soybean crop estimates.

High U.S. unemployment, skittish shoppers and rabid competition from Wal-Mart Stores Inc (WMT.N: ) and dollar stores have made grocers reluctant to accept price increases, while people could change their eating habits if costs rise too much, analysts said.

Shares of meat producers Tyson Foods Inc (TSN.N: ) and Sanderson Farms Inc (SAFM.O: ) are down 7 percent and 3.9 percent since Friday’s USDA crop production report because corn is a key ingredient for livestock feed.

Corn is also used to make high-fructose corn syrup, a sweetener widely used in soft drinks sold by Coca-Cola Co (KO.N: ) and PepsiCo Inc (PEP.N: ) in North America, as well as many other popular, processed foods.

Corn futures on the Chicago Board of Trade have rallied to their highest level in more than two years this fall in response to disappointing yields in the U.S. harvest, coupled with strong global feed demand following a crop shortfall this summer in the Black Sea region.

But the impact on consumer prices is not likely to show up immediately. Most large companies are somewhat insulated from commodity volatility by hedges that often lock in their costs for at least six months.

Tyson is hedged through December 2010, said D.A. Davidson analyst Timothy Ramey, and as of July held forward contracts for 32 million bushels of corn. Smithfield Foods Inc (SFD.N: ), he said, also has coverage on corn costs with contracts varying between 20 million and 50 million bushels for the most recent quarter.

“Although covered, the reduced corn crop is negative news overall for protein producers and will lead to higher prices for already pressed consumers,” Ramey said in a client note.

But when people notice that meat costs more, they are likely to change their buying habits, said Christopher Shanahan, a food industry analyst with Frost & Sullivan.

“In the short run, I think it will be OK, I don’t think there will be a lot of change,” Shanahan said of consumer behavior. However, with a large increase over a long period of time, consumers may switch to lower-priced meats like lunch meat or hot dogs or to non-meat items, he said.

Getting price increases through in the first place is not a foregone conclusion, as retailers sometimes balk at making prices higher for their customers.

Manufacturers also know that if they raise prices too much, they risk losing sales. As a result, food and beverage companies have been discussing price increases on specific items.

Gorham said that Coke’s and Pepsi’s recent acquisitions of their North American bottling operations makes them more sensitive to corn prices.

“Last year … they’d have tried to make the bottlers eat the price increase,” Gorham said. “They had this cushion between themselves and the consumer. That’s gone now.”

(Reporting by Martinne Geller. Additional reporting by Bob Burgdorfer and Julie Ingwersen in Chicago. Editing by Robert MacMillan)

Analysis: Corn spike may pressure meat, drink makers