Corn is found in
three out of four supermarket products.
So given that corn futures are now down 40% YOY for October, you might think we might be seeing the cost of groceries declining.
Not so, says JP Morgan.
In a new note, retail analyst Ken Goldman writes corn and other food ingredients represent less than half the picture among packaged food firms’ cost of goods sold — not enough to tilt the cost picture:
“…we believe foodstuffs (corn, wheat, meat, et al) make up less than 50% of average COGS (we estimate ~40%). Other COGS drivers include manufacturing and labour (which we estimate are ~22% of average COGS), freight and energy (~21%), and packaging (~16%).
“Thus, even if foodstuff inputs are down in 2014, total COGS do not automatically have to decline.”
According to the firm’s analysis, all those other elements are going to increase.
“…based on the forecasts of J.P. Morgan Paper and Packaging analyst Phil Gresh, as well as our own assumptions, we expect average food packaging costs to be up ~5-10% on average in 2014. And based on futures prices, we expect freight and energy costs for manufacturers to be inflationary, too.”
At least three companies have already warned of cost inflation, not deflation, Goldman notes.
In addition, he says, JPM’s inflation model has been 72% correlated with packaged food gross margins.