Crying for the General and the K

Not a lot of farmers are going to be crying about the plight of the General or the K, but their situation shows the flip-side of the good times farmers are experiencing with crop prices.

Today General Mills came in with quarterly results that fell beneath analysts’ expectations. The reason the company cited: higher crop prices and intense retail competition.

Earlier this season Kellogg Co. did the same thing. The reason: higher crop prices and intense retail competition.

It’s an ugly time for both companies, and the entire cerealmaker industry, as they prove to be not-so-immune to bad economic times as most people thought they would be. Typically, in weak economic times, things like breakfast cereals keep their demand and sales. People shed all sorts of other expenses, but not breakfast cereals. They may leave the bacon and eggs at the grocery store, and they’ll switch to Cheerios, Oatmeal, Corn Flakes, etc.

However, during an economic downturn and a time of surging crop prices, cereal makers are caught between the hammer and the anvil. And their results are getting hammered flat. Here are charts that show what a shareholder sees when he looks at his investment statement:

KellogGeneral MillsThose are the shares of K and GIS over the past 365 days. Not so merry. (General Mills is looking better, though, with a slight rise and a line of higher lows.) I imagine they feel a little the seated Prisoner in this clip, tormented by sadistic commodity prices, but not so defiant as my hero in this scene. (I note that Patrick McGoohan looks oddly similar to my friend Dave B. How could I not notice this all these years I’ve known Dave?)

Sugar prices doubled this year. That’s not good if you manufacture the sorts of cereal that children love and dentists hate. Corn prices are way up. Wheat prices are uppity. And oats – well they’re way up in the stratosphere. If you’re a risk management officer at Quaker, General Mills or Kellogg and earlier this year you decided to not hedge your exposure to crop prices, you ain’t getting much of a Christmas bonus this year.

The cereal makers are suffering because they have tried to pass on their cost increases through higher prices to retailers, but retailers are trying to entice shoppers by cutting prices. Those two things don’t form an easy equation. And each cereal maker is trying to snatch more of this weakening market by cannibalizing the space, which also hurts their ability to jack-up prices.

None of this means anything to farmers right now. People are still going to buy cereals, even if they wait for the stuff to be discounted. So most of these companies will keep their plants running, make less money than they expected, and face glum shareholders at annual meetings. Farmers don’t need to feel too much sympathy for the manufacturers, because the manufacturers don’t spend a lot of time worrying about the plight of farmers when crop prices are low. That’s often a key ingredient in the profits of a cereal maker: low input prices, high sales prices.

And in fact, the big fear of the oat-based cereal makers is that farmers will keep cutting their acres of oats and make it hard for them to get a reliable supply. Well, methinks the market answer for that problem is appearing: much higher prices for oats! That’ll keep the guys planting the crop. If you want guys to grow oats, just pay them for it. (And not as a run-of-the-mill cereal crop, but as a specialty product, which milling oats are.)

However, at a certain point demand gets “rationed,” which means buyers just get sick, disgusted and broke and refuse to keep buying the stuff. At some point, if crop prices keep surging – as many analysts expect for 2011 – demand might start getting rationed. And that may start on January 1, when millions of turkey- and champagne-stuffed consumers swear New Year’s resolutions to lose some of that lard around their middle, and start filling the cereal bowl a little less full. That’s all it takes to weaken demand: everyone has half an inch less corn flakes or Cheerios every day at breakfast.

So for now the cereal makers are suffering their dose of the medicine farmers so often choke down. But let’s keep an eye on these companies’ quarterly results, because if they start noting declining volumes of sales and flagging consumer interest, it’ll be time to start praying for the health of beleaguered crop buyers.

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