Why the crop crunch won’t cut your food bill
Corn, wheat and soybean futures are all trading at 52-week lows, with corn dropping over 30 percent on the year. But that doesn't mean consumers should budget less for English muffins or movie popcorn.
"It translates less than you would think," said Scott Nations of NationsShares and a CNBC contributor. "The cost of wheat that goes into the price of bread is relatively minor, compared to the price of the loaf."
This year's commodity crush came after a 2012 drought put severe pressure on crops, reducing supplies and spiking prices. As weather has been more favorable this year, record crop yields have been expected, and this has pushed prices down. But some back-of-the-envelope math tells us why this won't be noticeable at the supermarket checkout.
"As a rule of thumb, gross margins for food companies are in the 25-to-30-percent range, so that gives you an idea of what the cost of goods sold is" Jefferies analyst Thilo Wrede told CNBC.com. "And if the cost of goods sold is 65 to 70 percent of revenue, then input costs are half of that. And of those inputs, the biggest is energy—natural gas for cooking and for packaging, and oil for distribution. So grains are maybe 5 to 10 percent of cost of goods sold, depending on the company."
For that reason, while "you do you see a connection between input costs and costs on the shelf," grain prices don't have a huge impact on packaged food prices or on the performance of food stocks like General Mills or Kellogg, Wrede said. In fact, "it's really energy prices that you have to watch," according to the analyst.
Indeed, while wheat prices have been tremendously volatile lately—spiking by about a third in 2012 before retreating—bread prices have remained remarkably flat. The price of a pound of bread has stayed between $1.395 and $1.439 for all of 2012 and 2013, according to Consumer Price Index data.
To really see the impact of crop prices, consumers should look to commodities like coffee or milk. "A product like a gallon of milk—that's 100 percent milk," said Brock Thompson, a partners at Tru Trading, a commodity broker based in Amarillo, Texas. "That's not like your Doritos, which are made up of flour, some oil, stuff like that."
And on top of that, the agriculture weakness may not last.
"Weather's played a big role, and this year it's been good for the corn crop," Thompson said. But eventually, "the weather will turn out, and we'll get a little bounce in grains between now and the end of the year," he predicted.