Severe drought drives food prices north; food processors under pressure

Dinesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The severe, unrelenting drought conditions that swept the Midwest-US in 2012 are likely to prevail in the current year as well, spelling tough time not only for farmers and the public, but food processing companies as well.

Crop yields are expected to remain at their lowest levels since 1995. Experts feel that the drought will continue to drive food prices north, putting food processors under tremendous pressure and its effect is becoming visible on their stock prices.

Ernie Gross, an economics professor at Creighton University concurs,

"Forecasts are for a four percent (price) increase in food this year, but I think that's on the low side if the drought continues. Food prices will likely be going up much more than the forecast."

Concerns over short term impact of the drought are pulling down shares of meat processing companies like Tyson Foods (NYSE: TSN). With food grain prices skyrocketing as a direct result of the drought, meat processors are going to find it hard to feed animals.

Grain prices have already soared by over 20% since May 2012 and way above the 50-year national average. As per the U.S. Department of Agriculture corn prices will hover around $7.10-$8.50 per bushel for the season ending August 2013.

Will there be a long term concern

Not likely, as the demand for protein is going to remain strong in the long term. Corn prices are expected to soften by close to 15% this season and further by 20% in the next two years. The record import of corn from Brazil is going to offset some of the reduction in US corn production. Brazil exported 19.0 million tons of corn in 2011-12 and 3 million tons in the September month alone.

Short term pressure

However, meat processors like Tyson are going to feel the heat of the drought in the short term. Broilers are fed with food grains directly purchased from the market, the elevated price of which is going to eat into its profit margins. Consumers already feeling the pinch of an across-the-board hike in prices are going to balk for sure at the increase in price of chicken, beef, and pork products.

Way forward

The diverse portfolio of Tyson Foods should see it through the dark patch. It has a wide variety of offerings including red meat and value added chicken. Besides that, it has tie-ups with national fast food chains, restaurants, food service distributors, and retailers. Like it or not, an increase in prices should be in the offing to give it a boost. 

As and when the rains return, prices are going to ease and Tyson Foods will be back in business. Back in December last year, Wright Brand Bacon, part of Tyson Foods, struck a deal with FLW, a premier tournament fishing organization, for the financial year 2013. Would that give its stock a push? Seems highly likely!

Competitor speak

"This pig can fly," read one of the advertisements of Smithfield Foods (NYSE: SFD) for the speed with which its shares rode sharply at one point of time. Its stock value has plunged by 22 percent since 2007, while that of Tyson Foods is up by 33 percent. The world's largest pork processor plans to end the current fiscal on a high with as many as 100 new branded meat products. 

Pilgrim's Pride (NASDAQ: PPC) is going strong, however, and is being touted as the perfect stock for investing in. It has beaten all odds and clocked strong growth with sizable profits and a positive outlook. 

Overall outlook

Has the food processing industry gone past the worst? It may have done so already. Improving economy will keep adding jobs and that will enable more people to head for restaurants. The settling of debt ceiling debate is only going to help the economy further,

None other than Sanderson Farms (NYSE: SAFM) CEO Joe Sanderson Jr corroborates.  He said while refering to the debt ceiling debate,

“If that were to be resolved, that would make people feel better.”


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