Pumping Gas and Soft Drink Prices

It’s an unusual equation, and the variables include commodities speculators, the weather, international trade, and congress, but only one constant: corn.

Millers derive high fructose corn syrup, the number two ingredient for most soft drinks, and ethanol, the number two ingredient for gasoline, from the same yellow kernels. The cost of those kernels jumped in the last few months after congressional efforts for energy independence collided with the fallout from a volatile stock market.

Beverage manufacturers have seen those costs passed on to them. Food Business News reported in early April that HFCS cost an average of 18.65 cents per pound, up from an average of 15.7 cents at the same time last year. That’s a 19 percent increase that’s causing financial pain for beverage companies. And that pain will likely travel down the supply chain into the cooler case.

Brian Weber, Vice President of DLR Associates Inc., the makers of Potencia Energy Drink, said he found out about the price hike when his company mixed its last batch, but they got lucky.

His supplier had a stock of HFCS bought last year at the lower price, Weber said, allowing him to dodge any price hikes until at least the next production run. By then, he said, DLR may have another plan in place to deal with HFCS prices.

Bigger companies likely won’t be as nimble. Coca-Cola Bottling Co. Consolidated, one of Coke’s largest regional bottlers, reported a 14 percent drop in profits in 2007 compared to 2006, partly due to rising sweetener costs. Analysts at the investment bank Morgan Stanley recently cited rising commodity costs as one reason they believed stock in PepsiCo Inc., had become a riskier investment. They also offered insight on how Pepsi could offset the higher cost of HFCS: either increase productivity or raise prices – as much as three percent in 2008, according to analyst Bill Pecoriello.PepsiCo representatives declined to comment for this article, but their corn-related troubles and those of other beverage companies can be traced not back to the field, but back to the oil barrel.

Congress mandated gasoline companies to blend 9 billion gallons of ethanol with regular gasoline in 2008 – up sharply from the previous 5.5 billion gallons. The corn-based substitute for oil-based fuel appeals to politicians because it is renewable – taking 97 percent of its matter from the air – and reduces reliance on oil from the conflict-ridden Middle East.

According to Nathan Fields, director of research and business development for the National Corn Growers Association, that high-level mandate has attracted investors who fled the troubled waters on Wall Street. Now dabbling in commodities futures, Fields said those investors are exacerbating the natural swings in corn prices.

Fields said market forces alone would have pushed the price of a bushel of corn beyond the typical $2-4 range, but those newly-arrived investors forced the cost of corn north of $6.00 per bushel on the Chicago Board of Trade.

Ironically, that extra push has led to the slowdown of the industry that attracted investors to corn in the first place. Jon Birger wrote for CNN Money in February that the high price of corn had cut the profit margins on ethanol, so much so that companies have shelved plans for as many as 50 planned ethanol plants.Birger reported that the price of corn has jumped 60 percent since the third quarter of 2007, while the price of ethanol has only risen 30 percent. That squeezes companies like Verasum Energy Corporation, Birger said. Verasum’s profits fell from 37 percent to 12 percent in the third quarter of 2007 at the same time that corn costs rose from $2.05 per bushel to $3.32 per bushel. Birger predicts the economics of Ethanol will change, with market forces favoring large-scale producers like ADM.

But even if the ethanol market cooled, University of Illinois professor of Agricultural Economics Darrel Good said international trade will help keep the price of corn high. China has reduced its corn exports, Good said, draining the pool of internationally available corn and leading more international buyers to get their corn from the U.S.

Good said America’s economic climate adds a financial bonus to overseas U.S. corn buyers.

“Importers have not felt the full brunt of the price increase because of the weak dollar,” Good said.

In theory, increasing the cost of a bushel of corn should increase the price of all corn derivatives including high fructose corn syrup, but Craig Ruffolo, a paid consultant for the corn industry, suggested that may not be the case.

HFCS buyers meet with their supplier once a year – typically between October and December – to determine the price of the sweetener, Ruffolo said. During that period last year, corn prices generally hovered below $4 per bushel, though the price spiked in early December.

Ruffolo added that other factors could play in to negotiated prices. Beverage companies turned to HFCS because it was cheaper than sugar, Ruffolo said. Recent media coverage of the sweetener linked it to America’s struggle with childhood obesity, and some beverage companies are switching to cane sugar — a more expensive commodity.

The laws of supply and demand suggest that a drop in demand could negate a price increase. Maybe it will, but it hasn’t yet.