Tuesday, May 22, 2007

Corn Processors Easily Passing Along Cost Increases

Corn Products (CPO) CEO Samuel Scott said in a conference call with analysts. "We were able to get prices through in the areas where we did not have fixed prices sooner than we anticipated."

The company's sweetener products, such as high fructose corn syrup, or HFCS, account for 55% of sales in all three of its segments. The #1 US producer in the US and worldwide is Archer Daniels Midland (ADM). Starches and co-products, such as corn oils and feed, make up the rest of the company's products. Corn Products, the number 4 HFCS producer in the in the U.S. said it's ability to pass along corn price increases to its customers faster than expected helped profits. .

Another major factor was the elimination of a 20% tax on US HFCS being imported to Mexico. The tax shut down a big chunk of the market overnight for U.S. exports of HFCS as well as bulk corn for HFCS production by U.S.-owned firms, said Corn Refiners Association spokeswoman Audrae Erickson.

The tax was ruled illegal and was repealed. Last summer, NAFTA reached an agreement to send up to 500,000 metric tons of HFCS into Mexico from October 2006 to December 2007. NAFTA's full, free-trade agreement opens up a huge soft drink market to many corn refiners.

Assuring the use of HFCS in the US, Coca-Cola came out and said they were disappointed with their North American results and wanted to drive Coke Classic again. HFCS is the sweetner used in these non-diet drinks. With the South American ethanol boom increasing sugar prices, soft drink makers have no alternative but to swallow any price increase corn processors decide to pass onto them.

More good new for ValuePlays Portfolio member ADM, up 16% since my January recommendation. With gas prices surging, ethanol is very profitable desipite corn's price increase. We now know that corn food processors are able to pass along this additional cost to buyers also. When you consider the additional demand from Mexico coming online soon, it looks like more demand induced upward pricing pressure will benefit corn processors. After all, what alternative product do HFCS users have? The answer? Nothing...

ADM will be ringing the registers

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