I was recently speaking with a large food processing company VP-Purchasing and found the conversation nothing short of fascinating. Unfortunately, what is a very interesting topic to me has him in white knuckle mode, just trying to weather the storm. What is causing this pain and suffering in the food industry?
Corn has seen pricing track at a 10 year average of $2.30 per bushel, this company planned in the $3.30 – $3.50 per bushel range and the futures markets are trading at a whopping $4.30 per bushel which is now causing tens of millions of dollars in purchasing “headwind”. I think many people can triangulate the problem coming from the nation’s recent drive towards ethanol and alternative fuels. Clearly, our oil dependence puts the US in a constant uncomfortable position and we need to find and pursue alternative energy sources but it is important to recognize how waiting so long and now acting is causing a ripple effect that will impact virtually everything.
Since the government is heavily subsidizing the corn production for ethanol refining, it is more profitable for farms to devote land to corn for non-food use. This directly impacts the cost of pork, beef, chicken, milk and many others because feed corn is now fuel corn. Potatoes and soybeans are facing similar pricing shock treatment because the cost of land has skyrocketed for non corn usage as an opportunity cost of forsaking corn production.
These cost increases will now effect all consumers in the form of tax burdens from the subsidies and broad increases among many food products at the store and in restaurants. This will impact all sorts of industries as the supply chains overlap and ripple while consumer spending is likely reduced…uh oh, that now is going to impact almost every single industry as the spiral continues.
I know this company is doing everything possible to mitigate risks while reducing or avoiding costs, where possible, but it is clearly one of the more difficult positions I have heard in some time. I am not an economist nor a commodity expert but I can deduce that this situation is going to put pressure on a lot of sourcing professionals soon. If you can find six degrees of separation between your markets and corn, you should be already preparing for your supply management strategy and planning.