Chiquita Slips on High Costs

This post first appeared on Minyanville.

Food-makers are struggling to maintain margins as persistently high commodity prices pressure already slim margins. Some firms are even shrinking boxes to sustain profitability. Unfortunately for Chiquita Brands (CQB), it can't sell half bananas.

Yesterday, the purveyor of bananas and other fresh fruit warned investors of an ugly third quarter. The company said higher input costs, bad weather in Latin America and weak seasonal demand for fruit will push it to a loss for the quarter ending July 31st. Shares traded down sharply, off 28%. Competitor Fresh Del Monte Produce (FDP) also took a beating, tumbling nearly 16%.

Chiquita said that although its banana prices are steadily rising, tepid demand and thinner margins are eating into profits. The company expects to return to profitability later in the year, indicating an expectation that higher fertilizer and fuel costs will subside and more normal buying patterns will return.

In an effort to fend off skyrocketing commodity prices, food makers like Chiquita are being forced to pass higher input costs along to consumers. Professor Depew notes some firms are resorting to smaller sizes in an attempt to bring their offerings more in line with shrinking demand. General Mills (GIS) is reducing cereal box sizes, Wrigley (WWY) is dropping the number of sticks in each package of gum and Coca-Cola (KO) and Pepsi (PEP) are ditching the 20-ounce soda in favor of the smaller, 16-ounce size.

Other companies, like Kraft (KFT) and Sara Lee (SLE) are simply raising prices.

Fruits and vegetables aren't what one would normally consider discretionary purchases. Unlike plasma TVs and Nintendo Wiis (NTDOY), humans don't survive very well without vitamins and minerals. But as consumers trade down and opt for more affordable food items, nutrition often suffers. If this trend continues, we could see our already abysmal diet slide further into the deep fryer.

Fertilizer Firms Cash In

The following post first appeared on Minyanville.

Not everyone's complaining about the skyrocketing price of food.

Manufacturers of potash, phosphate and other plant additives have seen demand for their products soar. Tight supply has pushed up prices.

The Wall Street Journal reports fertilizer costs have jumped more than any other agricultural input, up 63% from a year ago compared to a 43% increase for fuel and 30% for seeds. Potash -- a rock that's ground up and used to strengthen plants -- has soared from $230 to over $700 per ton. Phosphate prices are also up more than threefold.

According to The Journal, legal price fixing is also partly to blame for higher prices. Legislation dating back to the early 1900s allows producers to effectively collude, using government sanctioned cartels to control export prices.

Canadian firms Potash Corporation of Saskatchewan (POT) and Agrium (AGU), along with Minnesota-based Mosaic (MOS), make up Cantopex, the Canadian cartel. Potash and Mosaic are the last remaining members of the U.S. group, the Phosphate Chemicals Association. The largest American producer of potash, Intrepid Potash (IPI) -- which recently went public -- is not a member of the organization. Even Russia has its own potash cartel, Belarus Potash Corporation.

The push for alternative fuels has squeezed acreage, as farmers replace fallow ground and less profitable crops with corn. Although this pop in demand is partly to blame for higher fertilizer prices, industry experts cite supply constraints as the chief culprit. Decades of weak commodity prices forced manufacturers to ratchet down production capabilities. Now, the structural shift in demand has caught fertilizer producers off guard. Supply-demand dynamics, along with pricing power, has sent prices soaring.

In response, farmers are scrambling to control margins. As feed and other input prices rise, they charge more for meat, chicken and eggs. However, profitability concerns result in a reluctance to invest in larger flocks or new slaughterhouses. Food price inflation is amplified, as supplies aren't rising to meet new demand from developing countries.

Irrespective of commodity market gyrations, demand for crop additives remains high. A recent New York Times article cited the availability of chemical fertilizers as one of the primary reasons much of the developing world has turned the tide against chronic malnutrition. As costs outstrip poor farmers' ability to pay for the additives that increase yields, those advances are threatened. Manufactures around the world are racing to increase production capabilities, but new plants won't come on line for years.

Investors and academics continue the debate over whether commodity prices are operating in a bubble. Speculators, many of whom are large enough to move markets on their own, are contributing to the spike in prices. Meanwhile, consumers in both the developed and developing world face higher prices for what they need most: food and fuel.