Grain prices are soaring as the Midwest corn belt suffers its worst drought since 1956, but that doesn't mean grocery bills are about to jump.
Easing costs of other commodities, hedging strategies aimed at keeping corn costs in line and fears of turning off consumers in a weak economy should all keep packaged food companies from hiking prices, at least in the short term.
"The spike is isolated, and thank goodness it is, because these companies have no room for pricing," said Edward Jones analyst Jack Russo.
Corn is a main ingredient for everything from livestock feed and sweetener to tortilla chips and bourbon. Corn futures have soared some 46 percent since early June as oppressive heat and the worsening drought stoke concern about food and fuel price inflation. Soybeans and wheat are also up dramatically.
Agriculture Secretary Tom Vilsack said this week that rising prices would mean higher meat prices, though the inflation might be delayed as farmers cull their herds due to high feed costs.
High corn prices might normally squeeze profit margins for loads of companies ranging from Hormel Foods Corp and Kellogg Co to Ralcorp Holdings Inc and PepsiCo.
But in this case, the price spike is limited to grains, and has not affected other key commodities like fuel and metal, which signals that widespread increases across packaged food are less likely.
In fact, Coca-Cola Co, which reported second-quarter earnings earlier this week, actually lowered its expectations for the how much commodity costs would rise this year. It now expects a $300 million increase, down from its prior forecast of $350 million to $450 million, even though it uses huge amounts of high-fructose corn syrup to sweeten its drinks.
"It was known what corn was when we made that statement," Chief Executive Muhtar Kent told Reuters in an interview following the revision. "It's not like we said we were looking at $300 million and now it's $150 million, I wish it was."
Coke is also a big buyer of fuel, plastic, aluminum and coffee, all of which are less pressured than before.
"When you look at the combined forecast, we're slightly tempering that," he said.
Last year, when corn prices doubled and almost all commodities skyrocketed on growing demand from emerging markets and macroeconomic uncertainty, Coke had an $800 million increase in commodity costs.
Right now, about 80 percent of packaged food companies have lower overall commodity costs compared with last year, according to Janney Capital Markets analyst Jonathan Feeney, due to steep declines in other ingredients like sugar, cocoa, peanuts and durum wheat.