By Jeff Wilson
CHICAGO - Corn farmers predicted a bumper crop this year in the United States. The surprise was the surge in prices that came with it.
A 77 percent jump in the past year has made corn the most expensive it has been since 1996, squeezing profit at Coca-Cola Enterprises, which uses corn as a sweetener, and Tyson Foods, which uses it as a feed for livestock. Speculators like Pacific Investment Management are basking in returns that go beyond forecasts made as recently as July.
Not even the third-largest harvest in U.S. history can stem the advance in prices. Rising sales to livestock and ethanol producers and a grain shortage outside the United States sent corn climbing to $3.72 a bushel last week. Prices may need to top $5 before demand slows, said Brent Harris, who runs a $14 billion commodity fund at Pacific Investment Management in Newport Beach, California.
Tom O'Connell Jr., chief executive of Dinklage Feedyards in Sidney, Nebraska, said, "We are caught in a big squeeze right now that will take six months or a year to work through." Dinklage, which feeds 165,000 cattle mostly corn until they are heavy enough to slaughter, may lose as much as $100 a head, O'Connell said.
Corn was the best-performing commodity in the past three months. Its 44 percent gain topped zinc and nickel, which rose to their highest levels ever. Trading in agricultural futures including corn more than doubled last month to a record at the Chicago Board of Trade, home to the largest grain exchange in the world.
Historically, low prices follow big crops in the United States, the largest producer and exporter. The record 2004 harvest of 11.8 billion bushels caused corn to sink from around $3.40 a bushel in April of that year to $1.94 a bushel 10 months later. But since the end of September, when most farmers started harvesting this year, prices have jumped 31 percent. The second- largest harvest was last year.
"This rally has gone straight up in the middle of harvest without backing off, and that has surprised a lot a people," said Steve Ebke, a corn and soybean farmer in Daykin, Nebraska, who is president of the corn growers' group for the state. "The end user has gotten used to buying cheap at harvest."
Richard Cogdill, chief financial officer of Pilgrim's Pride, the second- largest U.S. poultry producer after Tyson, estimates that every penny increase in the price of a bushel of corn adds $2 million a year to its expenses for feed. Cash prices for corn may be $1 a bushel higher on average this year, indicating an additional $200 million in expenses for Pilgrim's Pride, based in Pittsburg, Texas. The company had net income of $265 million in its 2005 financial year.
The biggest surprise in corn demand has been the increase in sales to the world's livestock breeders, who are consuming more U.S. corn.
Ethanol makers will consume a bigger share of the U.S. corn crop as government subsidies and high gasoline prices spur demand for the alternative fuel, said David Nelson of Credit Suisse.
Nelson said that every 10-cent rise in a bushel of corn cuts 5 cents a share from Tyson profit. A Tyson spokesman, Gary Mickelson, declined to comment. The company reported a net loss of $56 million on Monday, its third consecutive unprofitable quarter, because of low beef and chicken prices and higher costs.
Corn Products International, based in Westchester, Illinois, and one of the largest makers of high-fructose corn syrup, a sweetener used in soft drinks and desserts, is negotiating to raise prices because corn accounts for as much as 60 percent of its costs.
"The sudden spike in corn will likely drive high-fructose corn syrup up as much as 25 percent," a Morgan Stanley analyst, William Pecoriello, said Monday in a note to investors.
Coca-Cola Enterprises, the world's largest bottler of soft drinks, is trying to pass on the rising costs. It raised prices 3 percent to 4 percent this month and may charge more early next year to recover expenses for corn sweeteners, its executive vice president, Terrance Marks, said.