AGROLEADS.COM

Increased Consumption

Consumption of grains, especially wheat, is at an all-time high. The production of grains has increased as well, though not enough to keep up with demand. For the first time in recent history, world wheat production is less than wheat consumption, which is putting upward pressure on prices. Developing countries are particularly strong drivers of this trend. As incomes increase in countries such as China and India, people are consuming more grains and products that use grains than before, resulting in higher grains prices.
U.S. wheat prices from 2004-2007, $/bushel
U.S. wheat prices from 2004-2007, $/bushel

Impact of Weather

As an agricultural product, grains require certain growing conditions to fully develop. Changes in weather can greatly impact the yield of grains crops and, as such, grains prices. Grains are also grown across the world, exposing different crops to a variety of weather risks. For example, if a monsoon were to hit South or Southeast Asia, the world’s rice supply would be significantly impacted, but barley crops would be largely unaffected. Currently, wheat prices have increased substantially over 2006 price levels due to a combination of freezing temperatures and flooding in Kansas and drought-like conditions in Eastern Europe, a large wheat-producing region.

Demand for Ethanol

Increasing demand for corn-based ethanol is driving up corn prices, which are up 70% from 2006. The International Grains Council estimates that over 86 million tons of corn will be used in ethanol production in 2007, an increase of 32 million tons over 2006. The demand for ethanol can also affect other grains’ prices. As corn becomes more valuable, farmers are more likely to switch to corn production, which can decrease the supply of other grains. The demand for ethanol, and the subsequent increase in grains prices, is being driven primarily by the U.S., where rising oil prices and U.S. energy regulations are spurring the development and implementation of biofuels such as ethanol.

Companies that benefit from falling grains prices

* Kellogg (NYSE:K), General Mills (NYSE:GIS), Kraft Foods (NYSE:KFT), PepsiCo’s (NYSE:PEP) Quaker Foods, and Nestle (Public, VTX:NESN) are all major producers of breakfast cereals, most of which are made of either corn, wheat, rice, or oats. Falling grains prices would decrease these companies’ costs of production. Kellogg and General Mills would benefit most, as grains account for 64% and 46%, respectively, of their total food input costs.
* Kraft Foods and PepsiCo’s Frito-Lay are the largest multinational snack companies. Many of the products manufactured by these companies, including corn chips, cookies, and crackers, are made primarily of grain products.
* Anheuser-Busch (NYSE:BUD), Molson Coors Brewing Company (NYSE:TAP), and SABMiller plc (SBMRY) are some of the largest beer brewers in the world. Since barley is a major ingredient in beer, these companies would benefit from falling grains prices. Distillers such as Brown-Forman (BF) also use grain in the production of spirits, though to a smaller extent.
* Sara Lee (NYSE:SLE) and Campbell Soup (NYSE:CPB) are both producers of baked goods, especially bread. Wheat flour is the main ingredient in most baked goods.
* Hormel Foods (HRL), Tyson Foods (TSN), and Sanderson Farms (SAFM) benefit as grain prices fall. Grain is a significant input in the production of meat products as it is used for the feed of hogs, chicken, cows, etc.

Companies that benefit from rising grains prices

* Archer Daniels Midland (NYSE:ADM) and Bunge (BG) sell a variety of grain products to industrial customers. These companies would benefit as their products command higher prices from customers.
* Monsanto Company (NYSE:MON), DuPont (NYSE:DD), Syngenta (NYSE:SYT), and other manufacturers of genetically-modified plant seeds could benefit substantially from an increase in grains prices. Their seeds would be more valuable on the market and result in higher profit margins.
* AGCO (AG) and Deere & Company (DE), which make farming equipment, whose demand rises as grain prices rise.