Food Industry

Commodities prices have so far responded pretty much as expected to the USDA’s Prospective Plantings report, issued March 31. Corn prices are up, soybeans are way down.

That’s potentially bad news for meat processors such as Tyson Foods and companies such as Archer Daniels Midland that make corn-derived products such as ethanol and high fructose corn syrup. And it’s good news for big users of soybeans such as Smithfield Foods, a pork processor. And Bunge, a major bean-miller.

At least, that’s how the markets are seeing it today. But there’s a big caveat: the USDA report is based on farmers’ intentions, and “history reveals some significant differences between intentions and actual planted area,” Darrel Good, an economist at the University of Illinois, told Cattle Network late last week.

Corn acreage will likely decline, as the report states. And many farmers will likely switch over to soybeans and wheat, thanks in part to rising input costs for corn-growing. But there are other forces at work that might dictate what farmers might actually do.

For instance, ethanol production is in a bit of a trough just now, but the ethanol-friendly energy bill passed by Congress this year will spur more planting of corn, predicted Pablo Zuanic, an analyst at JPMorgan Chase. And he noted, also in Cattle Network, that long-term futures contracts seem to be supporting corn prices enough to forestall any mad rush into other crops. Also, it should be noted that the report is based on a survey early last month. Market conditions have changed since then, and they will continue to change as the planting season progresses.

It’s probably best to view Monday’s report as something like a political poll: a snapshot of a moment in time, but not a solidly reliable predictor of future events.

Kraft Foods CEO Irene Rosenfeld’s total compensation in 2007 was nearly 40 percent lower than in 2006 — a far bigger drop proportionally than the declines of Kraft’s profits and stock price.

In 2007, the company reported this week, Rosenfeld took home a total of $11.3 million, substantially down from her total compensation of $18.6 million the previous year. The dropoff in salary is even more pronounced when you consider that Rosenfeld started work at Kraft in the middle of 2006. That year, though, the company’s stock shot up by about 25 percent, with the lion’s share of the gains coming during her tenure.

Things have changed. Though the stock has fallen by only a few dollars since the beginning of 2007, profits are off by 15 percent.

In 2006, Rosenfeld received $675,000 in salary, $12 million in stock and options, and $185,000 in perks, according to company records. On top of that, she got a bonus of about $5.75 million. In 2007, her base salary increased markedly, to $1.38 million. Her perks went up, too – to $385,000. But she got no bonus, and her compensation from stocks and options came to just $7.2 million.

Kraft — the country’s largest food company and second only to Nestle worldwide — reported earnings of $2.6 billion last year, down from $3.06 billion in 2006. Revenues rose to $37.2 billion from $34.4 billion.

Pilgrim’s Pride, the country’s largest chicken processor, has named Robert A. Wright, its sales and marketing chief, as its new chief operating officer and announced that it will reorganize its management structure so that each of its four division vice presidents will report to Wright.

Wright is replacing J. Clinton Rivers, who ascended to the CEO’s office this month, three months after CEO O.B. Goolsby Jr. died of a stroke.

The moves come during a turbulent period for the beleaguered company, but they likely won’t do much to help. Feed prices are surging for reasons including the falling dollar, higher fuel costs, poor weather worldwide and the government-assisted shift of corn crops into ethanol production.

In response, Pilgrim’s Pride earlier this month announced it would close seven plants and lay off 1,100 workers.

Dealing as it is with forces largely outside its control, Pilgrim’s Pride was left with blaming the government for its ills. According to a statement issued by Rivers in the wake of the plant closings, rising costs are “due largely to the U.S. government’s ill-advised policy of providing generous federal subsidies to corn-based ethanol blenders.”

True enough, but that’s just one factor. He left out the others.

Joel Newman, president and CEO the American Feed Industry Association, this week acknowledged that there is a host of causes of rising commodity prices — ethanol being just one. He added that the situation doesn’t appear likely to improve any time soon. Corn selling for $5 a bushel looks to be closer to the new ‘normal,’” he said in his annual state of the industry report.

Last November, Monsanto said its gross profits might double by 2012. In an earnings-guidance update from the company on Tuesday, chief executive Hugh Grant said Monsanto is on track to do at least that well, and maybe better. “As we move closer to the Northern Hemisphere planting season, we’ve not only gained confidence in our 2008 opportunity, but also in our strategic path to 2012,” Grant said in a statement.

Rising grain prices, along with surging demand in places like China, are allowing the company to raise prices pretty much across the board. Its Roundup brand of weed-killer products has taken off to an eye-popping degree. The company forecasts that Roundup sales will hit $1.7 billion to $1.8 billion this year. Last year, sales were $854 million.

There is more to higher grain prices than just more money in the pockets of farmers and less in the pockets of food processors and consumers. Higher prices also mean that farmers are able to afford expensive, genetically modified seeds. And that can only be good for Monsanto, the world’s largest seed producer.

The company doesn’t mention it, but though economics are surely on its side, a big underlying reason for its success is the growing scientific consensus that genetically modified seeds may not be as hazardous to the environment or to human health as had been widely feared. When corn prices were low, it was easy for farmers to eschew pricier GM crops, especially when it was less clear whether they would pose a danger. And with corn prices rising, it’s just as easy for them to plant the seeds with enthusiasm. Unless researchers come up with some new reasons to fear GM corn, it is here to stay. The prospects for Monsanto — by far the largest producer of the seeds — could not be better.

I eat a heaping bowl of Cheerios just about every morning, so I bring home a box just about every week. Until lately, I’ve been faced with a problem – the box was so big I couldn’t fit it on the shelf of my cabinet.

That has changed recently, and it’s not only more convenient for me, it’s good for General Mills, which released earnings this week showing that it is dealing with higher commodity prices a lot better than most of its competitors. Companies such as Unilever and Kellogg have had trouble passing higher costs on to consumers. But in the 10K it filed this week, General Mills says sales of its cereals grew by 3.1 percent, “driven mainly by pricing and package size changes on established cereal brands led by Cheerios varieties and the Fiber One brand.”

In other words, it started selling less cereal for the same price.

It really is that simple, despite the company’s almost laughably labyrinthine spin. Here’s what CEO Ken Powell had to say to (a possibly depressed) Terry Bivens of Bear Stearns during a conference call with analysts on Wednesday.

I don’t know if you will recall this, Terry, because it was kind of an inside baseball look at right size, right price, but as part of that right size, right price exercise which involved changing the size and shape of all of our cereal boxes, we also were able as part of that exercise to kind of revise, you know, and improve the way the cereal boxes go through the manufacturing line, the way the cases work, the way they fit on pallets and all of this sort of thing. And so you know there’s actually going to be a quite significant productivity gain in the cereal business from moving to those revised right size, right price package configurations.

So those sort of productivity opportunities which were inherent in right size, right price coupled with the fact that our unit sales are up quite nicely this year — and it’s really units that we make in our factories — is we see many opportunities for driving productivity in the cereal business going forward. I would say we’ve increased, you know, the size of that pot significantly over the last year and a half as we’ve focused on it. So we’re going to see continued productivity growth in that cereal business, part of it because of the more efficient right size, right price box sizes.

“Right size right price” means “smaller size higher price,” of course. That’s not to say that General Mills, which also makes Progresso soup, Nature Valley snack bars, Pillsbury frozen dough products and Yoplait yogurt, is relying solely on such slight of hand. Sales were up in all its business units. And unlike its competitors, General Mills has managed to keep costs in check – even the costs of its input commodities, such as wheat. It has done this by smart hedging – locking in prices in the commodity markets.

“They are as well hedged as anybody in the food sector,” said Edward Jones analyst Matt Arnold.

(Cheerios image courtesy General Mills)

It’s been more than a year since Cadbury-Schweppes, under pressure from investors, said it would spin off its U.S. beverages business. But finally, it looks like it’s actually going to happen: The spinoff, with the somewhat silly-sounding moniker Dr. Pepper Snapple Group, will begin trading on the New York Stock Exchange in May, the company recently announced.

Issuing a new stock into one of the most volatile markets in decades might seem ill-advised, but waiting any longer could have been even worse for the British company’s debt-laden core confections business, which will be called Cadbury Plc. That it was able to pull off any sort of deal has to be considered a major accomplishment.

“It’s the end of the beginning,” Andrew Wood of Bernstein Research told the Financial Times. The beverages unit, he added, “has been a diversion for management for too long.”

Assuming that shareholders approve the spinoff when they vote next month, the company may have just barely made it. Its initial plans to sell the beverages unit to a private equity consortium fell apart as the credit crisis deepened, putting a halt to many private-equity deals.

The company’s Plan B, a public float, had analysts concerned that the company had waited too long. While the proposed divestiture is not nearly as reliant on credit as a private-equity sale would have been, it still needs a lot of financing. Last week, the company announced that it had secured financing worth about $3.8 billion from five major banks.

The new company will not initially pay dividends, which may have been the only way it could secure credit. The initial offering is expected to raise about $4 billion, which will go toward paying down Cadbury Plc’s debt load.

Even as the credit markets were limiting Cadbury’s options, the company was under enormous pressure from Nelson Peltz, the activist shareholder who for more than a year has been loudly prodding the company to change its ways. Even with the added costs of the demerger, Mr. Peltz is likely to be satisfied by the move, at least for now. No doubt he will continue putting pressure on Cadbury Plc., but even there, things are looking up, with the company reporting higher margins, bigger profits, and increased market share in the U.S. chewing-gum market. Still, Mr. Pelz is no wallflower — in December, he boosted his stake from 3.5 percent to 4.5 percent and issued warnings of a takeover of Cadbury, even as the company was planning the demerger and making other moves in order to placate him.

Theoretically, Cott Co., a maker of discount, store-brand soft drinks, should be doing well. As overall sales of soft drinks continue to drop due to rising prices, logic dictates that consumers should be flocking to lower-priced alternatives.

But they aren’t, and that spells trouble for Cott.

Overall, soft-drink sales dropped by 2.3 percent last year, Beverage Digest reported this week. For Cott, sales fell by 8.5 percent, and the company lost 0.3 percent of its market share.

The bad news is likely to continue. Last month, Wal-Mart informed Cott that it was reducing the shelf space it gives to the company, which makes the store brands for Wal-Mart’s flagship stores and for its Sam’s Club warehouse outlets.

Wal-Mart makes up nearly 40 percent of Cott’s sales. It’s not yet clear how much shelf space Cott will lose.

Cott is just as vulnerable to rising commodity prices are the dominant players, Coca-Cola and PepsiCo. Like them, Cott has had to raise its prices and has lost sales as a result. But soft-drink consumers tend to be brand-loyal, and few Coke- or Pepsi-drinkers have switched to lower-priced alternatives. For one thing, the price gap just isn’t wide enough. For another, there are many more alternatives than there used to be.

That’s not to say Coca-Cola and PepsiCo are doing well. They have raised their prices by 5 percent in the past year, and their sales of soft-drinks have each fallen 2.7 percent, according to Beverage Digest.

“Ugly stuff,” declared Paul Kedrosky on his blog, Infectious Greed.

Like most other food and beverage producers, the soft-drink giants are being squeezed by leaping commodity costs. The resulting higher retail prices have sent consumers scurrying not to discount soft-drink brands, but to alternatives such as “enhanced” water, energy drinks, and tea-based beverages.

Energy drinks are included in the soft-drink category. If they hadn’t been, the fall-off in sales might have been far worse, Beverage Digest noted. Energy drinks are among the beverage categories that are on the rise, but they still make up a small percentage of the market.

The trouble is, although both Coca-Cola and PepsiCo have made major forays into alternative beverages in recent years, it hasn’t been enough to offset losses in their core products.

Plans by JBS SA, a major global meatpacker based in Brazil, to spend about $1.2 billion in cash and stock to acquire two U.S. beef businesses are so audacious that they seem almost intent on drawing the close attention of federal regulators

The deals are almost certain to draw regulatory scrutiny since they would create the nation’s largest processor of beef in the hands of a foreign corporation. In many ways, JBS could not have picked a worse time, politically speaking. With the economy sinking, the dollar falling, and election-year protectionist sentiment seeping through Washington, regulators might have more reason than ever to look askance at a foreign company that appears intent on cornering the American beef market. Add to that, of course, the rising fears about meat safety in the wake of last month’s massive meat recall, the largest in U.S. history, at California’s Hallmark/Westland Meat Packing.

TheDeal.com reported this week on the likelihood of close federal scrutiny of the deals. According to that publication, the acquisitions would put JBS in control of nearly a third of the American beef market. The targets are National Beef Packing, for which JBS has offered $560 million, and the beef operations of Smithfield Foods, for which the company wants to pay $565 million.

Together with JBS’ acquisition last year of Swift & Co., the deals would combine the nation’s third-, fourth-, and fifth-largest beef processors. Even before the deals, JBS is the world’s largest producer of beef, with about $12 billion in annual sales.

The proposed deals did not come as a shock to Steve Cornett, who writes the Beef Today blog for AgWeb.com. “Neither of these buys came as a surprise to anybody with his ear to the ground,” he wrote. “But both at once? That is, what? Flamboyant?”

JBS is on a global acquisition tear. In December, it spent $342 million for a a 50 percent stake in Inalca, an Italian beef processor. It paid $1.5 billion for Swift last July.

The falling dollar may have politicians and regulators in Washington wary about such acquisitions, but it also no doubt is a major factor behind JBS’ decision to pounce – the Brazilian currency is up by more than 25 percent against the dollar over the past year.

Ethanol producers, which have been taking a lot of the blame for rising food prices – and rightly so – may have gone too far, boosting demand for corn so much that they have priced themselves out of their own market.

Agribusiness giants such as Cargill and Archer Daniels Midland, along with a slew of smaller operators, have taken America’s cornfields by storm in recent years, armed with massive government subsidies.

But now, there’s trouble in the moonshine business (ethanol is essentially the same stuff that came in jugs labeled ‘XXX‘ in Ma and Pa Kettle movies). Corn prices have exploded, but prices for ethanol itself have crashed. Profits have evaporated. The agribusiness giants will suffer — but only briefly, and only a little. Many smaller operators will have a hard time surviving.

Not even two years ago, corn was selling for less than $2 a bushel while oil prices were soaring. Ethanol seemed like a can’t-lose proposition. Cargill, ADM, and the rest rushed to build plants and cash in. They built too many. Now, corn is going for about $5.50 a bushel, and ethanol prices are falling through the floor.

But, as the environmental site Grist says, “don’t shed any tears over Archer Daniels Midland.” Or over Cargill, for that matter – even though that company recently suspended plans to build a $200 million ethanol plant in Kansas, sending shock waves through the industry.

But in the long run, it isn’t the big producers who will be hurt, it’s the small ones, including farmer-owned cooperatives that had looked upon ethanol as a way to throw off the yoke of ADM and Cargill, major producers of pretty much everything that’s made with corn. In large measure, they dictate how much farmers earn. They also affect how much you pay for your corn flakes, your soda pop, and your T-bone steak, since their demand for corn to make ethanol isn’t going to soften in the long run. Not with all those government subsidies backing them up.

Independent farmers, like the agribusiness giants, are also beneficiaries of the ethanol boondoggle, of course. But that matters little given the giants’ vast resources and market power. As the market shakes out, it won’t be ADM or Cargill that will suffer most. And when the shakeout is over, they’ll have even more market power than ever.

(Farmland mage by Chimpola, C.C., 2.0)

As commodity costs have soared, analysts have been pleading with Kraft Foods to raise its retail prices. But the packaged-food giant has hesitated, worried that higher prices would send consumers scurrying to discount brands.

Such is the dilemma created when inflation hits during an economic slowdown.

Kraft is facing “unprecedented input cost inflation,” said Rick Searer, the president of Kraft North America, during a food-industry conference last month. But he admitted that outside forces aren’t totally to blame, according to the Wall Street Journal’s Real Time Economics blog. “Our brands weren’t strong enough” to keep customers loyal, he said.

Still, loyalty can go only so far when, for example, dairy prices are rising at a breathtaking rate — 40 percent in the fourth quarter alone — even as consumers are worried about their jobs and their savings.

Kraft is a year into a three-year turnaround plan meant to introduce a slew of new products and boost overall sales. At the same time, the company is drastically reducing costs, having recently cut 700 jobs. More cuts are likely on the way, though Tim McLevish, the chief financial officer, told the Chicago Tribune that they won’t be drastic.

Some of Kraft’s rivals are less worried about passing costs on to consumers. At the same conference last month, Brenda Barnes, chief executive of Sara Lee, said there is no indication that customers are looking for cheaper alternatives to that company’s desserts and cold cuts. Sara Lee, for the fourth time in the past 18 months, will soon increase prices on its bread products to make up for rising wheat costs.

And General Mills chief executive Ken Powell said he is “not seeing any resistance” to price hikes on its cereals and snacks. The question now is, how long can that last?