Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Mother Nature Doing All She Can to Make Us Pay More for Food

Blame the weather, blame the government, or blame the producers. No matter who's to blame, the reality is that food production costs are rising, and Americans will likely see their grocery bills rising as the nation's largest food producers like PepsiCo (NYSE: PEP  ) and Dean Foods (NYSE: DF  ) try to hold onto otherwise diminishing margins.

Blame mother nature
For northerners in the middle of one of the coldest winters on recent record, it should come as little surprise that the fruit-and-vegetable-producing southern states have encountered challenging growing conditions through the winter months. Among the most notable victims is Florida's orange harvest, which has been faced with disease and dry weather that has led to expectations of a lighter harvest and in turn has spurred an increase in orange juice futures prices. Likewise, drought conditions in California could greatly affect many of the state's major crops and commodities, ranging from milk and beef to avocados and almonds.

Sadly, the problems have not been contained to just the U.S., as the world over has been witness to extreme weather conditions that have hurt harvests and will be felt by consumers. You may have already seen the effects at the grocery store a few weeks ago if you were planning a big Cinco de Mayo celebration: You either had to forego the limes or fork over relatively big money to buy them. On a much greater scale affecting global food production is the decline in corn production in China due to drier than usual conditions. Both at home and abroad, food producers and consumers will soon become intimately aware of the latest impacts of Mother Nature's unpredictability.

A chain reaction that will be tough to reverse
Agriculture and the food industry are naturally dependent on weather and seasonal fluctuations, though the breadth of the current worldwide weather impact is greater than in recent years, which have seen mostly isolated concerns in various regions in the U.S. and internationally. Starting with a late corn harvest in 2013, ongoing weather-related issues have pushed natural gas and propane prices up in-line with the rising futures prices of orange juice and milk. International demand has joined the weather issues to push up milk prices in particular.

Consumers may not have seen a substantial increase in milk prices, but as Dean Foods and other major dairy product producers see their margins pressured, the cost will end up being covered by consumers. Dean Foods struggled in the first quarter due largely to high raw milk prices, which led to a net loss in the quarter despite net sales that increased compared to Q1 2013. As the nation's largest processor of fluid milk, the continuation of high milk futures pricing will weigh on the company's yearly guidance, which was drastically reduced over continued pricing and margin concerns.

Coca-Cola (NYSE: KO  ) and PepsiCo may find themselves in similar situations as rising orange juice futures could cut into juice production margins. As the world's largest juice and drink companies, both Coca-Cola and PepsiCo are especially dependent on the Florida orange harvest, and consequently they are especially subject to rising orange juice futures prices that cut into the margins of their premium products. PepsiCo's Tropicana Company is the single largest buyer of Florida fruit, and with a recent push to source all of the juice in its Pure Premium orange juice from Florida, it is likely to feel the effects of dry Florida weather well beyond the current quarter.

The takeaway
Food producers have seemed hesitant to respond to rising operational expenses with price increases that will hit the consumer, but that will be quick to change as earnings reports across the industry continue to indicate a trend of tightened margins. Though not always the case, it seems as though the consumer price index is set to rise in line with the producer price index, which equates most simply to higher prices for consumers at the grocery store. If or when the weather becomes more cooperative and commodity prices drop for the producers, I wouldn't expect major food producers to revert back to the low prices that have pinched their margins over the past year. In other words, higher food prices are on their way, and they won't be leaving anytime soon.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2963692, ~/Articles/ArticleHandler.aspx, 8/30/2015 10:50:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Shamus Funk

Shamus is a freelance writer for the Motley Fool focusing on energy, agriculture, and materials. He has his Ph.D. in Chemistry from North Dakota State University. After graduation, Shamus worked at a small biotechnology firm before becoming a professor of chemistry.

Today's Market

updated 2 days ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
DF $16.81 Up +0.13 +0.78%
Dean Foods Company CAPS Rating: ***
KO $39.45 Up +0.18 +0.46%
Coca-Cola CAPS Rating: ****
PEP $93.53 Down -0.07 -0.07%
PepsiCo CAPS Rating: *****