Scenario Study: Puffed Up Corn Prices
By IBISWorld Senior Analyst Nikoleta Panteva
The summer of 2012 will go down in history as one of the hottest the United States has faced. While this is undoubtedly good news for beach resorts and frozen yogurt stores, other US industries are experiencing a different fate. According to the US Department of Agriculture (USDA), the price of corn has already jumped nearly 50.0% from this time in 2011 due to a drought in the Midwest that has created an inhospitable environment for crop farming. This region of the country is known as the Corn Belt, a name that proclaims the crop that has been most strongly affected.
IBISWorld has applied this price change to its collection of over 700 industry reports, weeding out the supply chain winners and losers of the corn price spike. The risk scores displayed indicate how much risk a particular industry is forecast to face over the next 18 months.
Winners
Despite popular concerns, corn farmers are actually set to benefit from a 50.0% increase in the price of their crop. Corn farmers experience strong and inelastic downstream demand from a wide range of food industries, so a jump in price will not sever ties with buyers. Instead, the price hike can and will be passed on to food producers, livestock farmers and organic chemical (e.g. ethanol) manufacturers. As a result, corn farmers are set to benefit from selling their output at a higher price, generating higher revenue and profit. Moreover, the USDA has projected that output will fall only about 15.0% from 2011, which is not a drastic enough decline to offset the growth from the price gains. As such, the heightened price of corn will help America’s corn farmers. IBISWorld projects that the risk score for the Corn Farming industry (IBISWorld report 11115) will decline from 5.34 to 4.07 in 2013 as the price of corn increases.
Soybean farmers are also set to benefit from the drought. Because corn and soybeans are often substitutes for each other in livestock feed, a rise in the price of one will increase the demand for its relatively less expensive counterpart. Although soybeans cannot be substituted in each instance that corn is used, soybean farmers do stand to benefit somewhat in this scenario. Higher corn prices will increase the demand for soybeans, causing these farmers to either plant more crops or sell their existing product at higher prices. This translates to higher revenue and a lower risk score for the Soybean Farming industry (11111). In 2013, the overall risk score for the industry is expected to come down from 3.97 to 3.56 due to the rising price of corn.
Losers
The $3.3-billion Tortilla Production industry (31183) uses corn as its key input. When the price of ingredients increases, purchasing costs for food manufacturers go up, limiting profitability. For tortilla makers, purchasing costs account for 60.0% of revenue, and profit is a slim 6.1% of revenue: an increase in costs could easily push some operators into the red. Furthermore, because one-time price spikes cannot be quickly and efficiently passed on to downstream wholesalers, retailers or consumers, producers end up having to absorb the heightened cost and losing profit. IBISWorld anticipates this industry’s risk score to increase from 4.37 to 5.01 in 2013 as a result of rising corn prices.
Corn is also used in a variety of syrups and sweeteners, including high-fructose corn syrup, which is used in soft drinks, snacks, candy and other processed foods. Consequently, when the price of the commodity jumps, input costs for operators in the Syrup and Flavoring Production industry (31193) increase as well. Purchases represent nearly 50.0% of the average operator’s revenue and profit accounts for 8.0%; when the price of key inputs like corn rises, purchasing costs soar as well, pushing down profit margins. As a result, industry risk increases. In 2013, IBISWorld expects risk for syrup and flavoring manufacturers to increase from 6.07 to 6.55 as the price of corn jumps 50.0%.
Other food production industries like Flour Milling (31121), Cereal Production (31123), and Cookie, Cracker and Pasta Production (31182) also use corn as a key ingredient. Together, food production industries spend about $220.0 billion on input purchases and have an average profit margin of 20.4%, according to a report by IBISWorld. likely to suffer from rising input costs and declining profit margins. Corn farmers, on the other hand, will benefit from the price spike. Because the drop in production will not offset the gain in price, industry revenue will increase rather than drop. Soybean farmers will also reap the rewards as livestock farmers substitute the protein-rich crop for corn in their animal feeds. As a result, the demand for, price of and possibly even the production of soybeans will rise.
For a further look at agribusiness and the risk associated with its loans, please refer to IBISWorld’s three-part series of Risk Management Association Journal articles. The first article in the series examines the rising price of food crops and its effects on farming industries’ creditworthiness. Here, long-term trends and supply chain linkages are the focus. The second article focuses on corn, soybean and wheat farmers’ downstream buyers and how a commodity price spike affects their credit rating. The final article focuses on the wide range of factors affecting loan risk for the food commodity supply chain.
To download full research reports for the industries discussed in this article, click on the report titles below.
Corn Farming, Flour Milling, Cereal Production, Cookie, Cracker and Pasta Production, Syrup and Flavoring Production, Tortilla Production, Soybean Farming, Livestock Production Support Services, Organic Chemical Manufacturing, Ethanol Fuel Production, Frozen Yogurt Stores
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