Article: Editorial: Commodity Crisis -- August 2008
William G. Lapp, principal with Advanced Economic Solutions, explored commodity costs in detail during Technomic’s Restaurants 2008: Trends & Directions Conference. “Commodity prices have basically doubled since 2002, but we have yet to see the increase in protein prices that, make no mistake, are coming.”
Every man, woman and child in the U.S. is responsible for the consumption of 3.2 pounds of corn per day--be it directly or indirectly via feed, ingredients, etc. This year will see U.S. corn stocks at their lowest levels in decades. Corn prices have doubled since just last summer, and poor weather and flooding will likely serve to increase these higher still.
There is a one in five chance that corn yields will be off 10%, history suggests. If that 10% decline in the 2008 U.S. corn crop comes to pass, Lapp predicts a number of consequences:
* Livestock margins would need to become extremely negative.
* Corn prices would need to rise sharply, possibly over $8 (a bushel) for much of the next year.
* A (bearish) government response of some sort will occur if the U.S. is “running out” of corn in 2008-2009.
* Smaller corn supplies would not only drive up the price of corn, but nearly all food inputs.
With a rise in feed prices, protein costs would likely be impacted. Cattle producers are currently losing $1 billion per quarter, estimates indicate, and those costs have to be passed to the consumer at some point. Likewise, chicken producer margins are now in negative territory, as feed costs have surged.
Further complicating matters, the trend is for higher inflation rates over the next two years. Between 2008-2012, food inflation is forecast to hit 7.5%, a mark unseen since the 8.7% rate in the 1970s. Worse, between 2009-2012, Lapp predicts a 9% food inflation rate, due to even higher commodity costs.
What strategies might be employed to weather this troubled market? Perhaps Lapp’s most prescient advice is to stock up whenever prices decline 5-10%, as this market will not be for the timid. Lapp recommends realistic expectations for costs and to ask what your company cannot afford to have happen. An honest evaluation and considered response could make all the difference.