Quick Thoughts – Corn, Inflation and the Consumer
According to yesterday’s Crop Progress Report from the U.S. Department of Agriculture, 2% of the nation’s corn crop has been planted thus far, compared to 3% at the same time last year and 6% historically – small numbers, to be sure.
- However, weather remains an issue with the small plantings year to date in primarily southern locations.
- Cold weather is back in much of the Midwest, so we would expect only limited progress this week in terms of getting the crop in the ground and even with decent weather for the balance of April, getting ½ the corn planted by the first week of May (historical benchmark) looks a little dodgy.
Having said that, plantings started slowly last year and yields were right on trend – generally speaking, we are less concerned about the start of the crop year given the speed with which the U.S. corn crop can be planted and the steady improvement in crop genetics.
Continued weather related planting delays may, however, prompt a further shift in acreage away from corn to soybeans – this, in part, explains our more bullish bias on corn and bearish view on beans though our view on corn is also driven by demand (exports, feed and ethanol) and the bearish view on beans by the strength of the South American harvest.
Stepping away from the more micro details of potentially higher commodity prices, we note that the CRB Index is +11.3% YTD (CRB is an index comprised of 19 commodities, about 1/3 petroleum related as well as soft commodities) – Exhibit 1.
In the past, we have highlighted a number of puts and takes on consumer income in 2014 and it appears that inflation across the commodity complex is emerging as another “take”, forcing consumers that may already be struggling with lackluster income growth to ration purchases in more discretionary categories – there is only so much to go around.
Alternatively, to the extent that higher prices are not passed on to the consumer in certain categories (some packaged food, for example), we are concerned about margin pressure over time (at HSY, GIS and K, as examples) in part forming the basis for our less than constructive view of that subsector of staples, despite our more defensive overall positioning (prefer staples versus discretionary).
Finally, to the extent that our view on corn is correct and that the price of soybeans remains elevated, we continue to see the margin expectations at the protein companies as unrealistic (TSN, SAFM).