A few weeks ago, I noted that the USDA had high hopes for corn production this year. Farmers eventually managed to plant a huge crop, despite long delays caused by a rainy spring. However, I expressed concern that the delays pushed too far into the season, and would make for an unhealthy crop. I also suggested that investors shouldn't be too quick to sell off shares of fertilizer companies, which would benefit from high corn prices.
Scarcely a month later, I've been proved right on both accounts. Corn prices are up nearly 20% in the interim, as more traders in the futures market come to question the USDA's recent estimates of crop health, especially given last week's abnormally hot weather. Meanwhile, fertilizer stocks are outperforming the broader market by a healthy margin. Terra Nitrogen
But high prices aren't sweet for everyone
But there's a flipside to all this. While some companies in the farming sector are benefiting from high crop prices, others are struggling terribly. Take Archer Daniels Midland
About 23% of the company's profits come from its agricultural services segment, which helps farmers store and transport their crops. High crop prices are good for this segment, since farmers can pay more for ADM's services, and are likely to plant more and thus have more crops to transport.
But ADM is also one of the biggest producers of high fructose corn syrup, and here high crop prices are bad, because they represent an input cost. Strong demand for HFCS and other sweeteners wasn't strong enough to offset the costs of production; profit on ADM's sweeteners dropped over 90% in the most recent quarter, all the way from $119 million to just $9 million. While overall gross profits increased, the stunning decline in the corn segment caused margins to shrink from an already-narrow 5.9% to 4.8%.
Another industry getting hammered by high corn prices is the poultry industry. Corn and soy are the main components of chicken feed, and while soy hasn't had nearly as big a run as corn, chicken feed is carefully formulated, and the two aren't interchangeable. This has meant that anyone in the business of raising chickens, whether for eggs or meat, has seen costs rise considerably, while an oversupply of chickens has kept selling prices down.
The normal response would be to cut production until prices improved, but for a while, many poultry companies were still trying to outproduce each other to gain market share. That game finally seems to be ending.
Pilgrim's Pride isn't alone, either. Egg-producer Cal-Maine Foods
The Foolish bottom line
High commodity costs aren't always bad, depending on who you're asking. Farmers and crop nutrient companies are certainly loving these high corn prices. The companies that have to buy the corn for use in their products, however, are having a terrible time. In some cases, like poultry, it's very difficult to pass those increased costs on, because the product is also a commodity, and has its own pricing formulas based not on cost of production but on supply and demand. Because everything is connected, a rainy day in Iowa can mean the difference between profit and loss for the right investments.