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As Corn Stalks Shrivel, So May Earnings

Will the drought in the Farm Belt dry up corporate earnings?
Vincent Ryan, CFO Magazine
September 1, 2012

The worst drought to hit the U.S. Farm Belt in almost 60 years has companies of many stripes forecasting the potential ripple effects in Securities and Exchange Commission filings. Companies linked to agriculture are preparing for lower revenues, tighter margins, and even higher leverage ratios for the rest of this year and possibly into 2013.

Low yields in the Midwest and the Great Plains states have caused corn prices to jump. Since corn and other affected crops like soybeans are used widely in animal feed and biofuel production, among other products, the tighter supplies and higher costs could dent performance in many industries.

CKE Restaurants, parent company of the Carl's Jr. and Hardee's restaurant chains, pulled the plug on its planned initial public offering in July, citing poor conditions in the stock markets. But in an amended S-1 filing in August, the company also said the extended drought could hurt its operating results. In the filing, CKE explained that beef costs may jump as much as 5% next year as the cost of feeding cattle rises. Beef is CKE's largest commodity expenditure, accounting for more than 20% of the company's total food and packaging costs.

Other companies are also worried about having their margins squeezed by higher input costs. An SEC filing from egg producer Cal-Maine Foods in August projected that feed costs, which make up two-thirds of the cost of farm-egg production, would be high and volatile in the year ahead, and they could adversely affect operations if Cal-Maine doesn't hike the price of its eggs.

Further upstream on the commodity supply chain, Bunge, which purchases and processes farm commodities, says the drought is exacerbating an already-tight global supply-and-demand balance, and that the price environment continues to increase the company's working-capital funding requirements, and, in turn, its debt levels.

Industrywide, while some agricultural business loans are covered by crop insurance, coverage is often not required. In August, insurer Partner Re said in an SEC filing that it didn't have enough information yet to arrive at a "reasonable estimate" for its future incurred losses, while Munich Re, a larger reinsurer in the agricultural markets, said that it expects approximately $200 million in losses related to crop failures.




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