High Corn Prices Will Pressure Food Industry

Many companies will face increasing pressure on margins if the drought continues in the Midwest, which would push the price of corn, soybeans and wheat up higher.

The problem is the state of the American economy, which continues to flounder, and which has resulted in people being very cautious about what food products they buy, and if they go out to eat at a restaurant.

Higher corn prices especially is what will dictate the direction food prices will go, including the price of meat, cereals, soda, and anything that includes corn as the sweetening agent.

For investors, what needs to be researched and found out is how hedged and protected the companies are that will be most impacted by higher corn prices.

The most vulnerable will be the packaged-food companies, which must bear the impact of higher prices. They will have to make the decision of whether or not to pass the higher prices on to consumers, whose sentiment is very low at this time, or to eat the rise in prices and lower the margins at the company, which will be detrimental to earnings.

It's either keep sales at lower margins or raise prices and lose some sales at higher margins. Either position isn't one the industry wants to face - yet they will probably have to.

For restaurants they face a similar challenge, although fast-food chains are under less pressure because the franchise owners are those who will have to bear the costs of rising corn and meat prices.

Companies like Coca-Cola (KO), Pepsico (PEP), General Mills (GIS), McDonald's (MCD), Yum Brands! (YUM), Kellogg Co. (K) and Sysco (SYY) could come under pressure if the circumstances don't change.

In 2011 the prices of meat, fish and poultry surged 7.4 percent, and is on pace to jump another 4.5 percent in 2012. This is because of the cost of feeding animals is rising because of the jump in corn prices, which is the main ingredient in the majority of feeds.

Lower temperatures are reportedly coming, so that will help with pollination of corn, as it suffers dramatically when temps approach 100 degrees, which has been the case in many parts of the Midwest.

The other problem is rain, which isn't as promising in most regions. The rain also needs to be of the type that isn't quick and just results in runoffs. Ideally, the rain should be the type that soaks the ground throughout the day.

If the weather doesn't improve in the next couple of weeks, the corn yield could be significant less than projected. Even now a portion of the corn won't produce even if the rains come.