Corn, wheat and cotton prices are expected to fall — and that could lead to gains in sectors far removed from the farm.
Deere & Company predicted on its February earnings call that agricultural commodities will lose ground this year.
The farm equipment maker estimates that corn prices will fall 17 per cent through the 2012 growing season, while cotton prices will drop nearly 15 per cent and wheat prices 10 per cent.
Those declines are roughly in line with the findings of a Reuters polls of analysts in January, who said they expected U.S. corn prices to drop 15 per cent to their lowest levels in three years.
Lower prices would be welcome news to supermarkets and retailers that have struggled to pass last year’s big jumps in commodity prices on to consumers. Analysts say a modest decline in the prices of raw materials could boost investments ranging from teen retailers to emerging markets and help offset higher transportation costs as gasoline prices increase.
Traditional supermarkets may be one of the bigger beneficiaries of softer crop prices, analysts said.
That’s because stores like Supervalu, Kroger and Safeway have lost market share to Wal-Mart stores and Target since the recession ended in 2009.
By expanding their grocery offerings, these retailers have positioned themselves as a one-stop alternative for still-jittery consumers and have used their purchasing size to offer lower prices on items like meat and bread that traditional grocery stores have a hard time matching. Wal-Mart, for instance, now gets more than half of its revenues from grocery sales.
Easing food prices will likely change, or at least slow, that trend, analysts say. “The supermarkets are going to welcome this relief because consumers are going to go back to purchasing more items” as prices stabilize, said Andy Wolf, an analyst at BB&T Capital Markets.
Supermarkets will likely get two margin boosts, he said. First, companies won’t lower prices immediately as commodities fall, allowing them to both make up for the steep jump in their costs last year and give them relief from higher gas prices.
Clothing retailers should benefit from lower prices of cotton this holiday season.
Teen retailer Abercrombie & Fitch, for instance, told analysts that it expects its margins to recover “significantly” later this year as cotton prices fall. Analysts say that they expect the trend to reverberate throughout the consumer retail market.