Grain price records - will higher food prices be passed through or hit margins?
Energy markets are not alone in struggling to navigate the impacts of war in Ukraine. Grain prices are showing similar trends, as the two nations at war account for 30% of global wheat exports. Wheat prices (W_1:COM) (NYSEARCA:WEAT) have hit record after record in recent days, while barley prices have more than doubled, and rough rice futures spiked to near record highs. Soybeans too have jumped post invasion, up ~40% from December levels.
The price rally is sure to be a boon for crop farmers and suppliers, like fertilizer names Mosaic (NYSE:MOS), CF Industries (NYSE:CF) and CVR Partners (NYSE:UAN). Prices are also likely to benefit traders like Cargill. However, record ingredient prices could compress margins for select beverage and consumer packaged goods names.
During the Company's latest conference call in December, General Mills (NYSE:GIS) head of Investor Relations Jeff Siemon said, "the cost that we're seeing this year on a year-over-year basis will be less of a headwind, which is -- which really drives gross and operating margin improvement in the back half." The Company has continued to trade well since the call; however, the comments suggest General Mills (GIS) may be relatively un-hedged as ingredient prices spike.
Anheuser-Busch Inbev (NYSE:BUD) had a bit more nuanced view, shared during the Company's conference call in February. CEO Michel Doukeris said, "we have inflation now across the board, but we’ve been dealing with inflation for many years in developing markets and our revenue management took it is being very helpful over the years." He went on to say that the consumer remains strong, and during a similar food price spike in 2008, the Company was able to raise prices to pass through higher costs.
Similar to the energy markets, producers of grains are likely to win as prices reach record levels. However, the near-term impact to earnings for processors of those commodities remains unclear. As conference season kicks off following Q4 results, analysts are sure to press management teams for any details related to cost management and pricing power.