Crop scouts try to predict costs in the U.S

Tom Polansek | The Wall Street Journal

Several major food manufacturers will follow this week to the wheat fields of Kansas in search of a forecast of U.S. crop, and possibly the cost of commodities in the coming months.

General Mills Inc, Sara Lee Corp.. and Nestle SA should send officials to the large barn in the United States to attend the annual round of visits to the plantations of the state. They will join officials, representatives of mills and journalists who try to assess the impact of drought on wheat crop in Kansas.

A record number of people should participate in visits because of growing fears about the impact of poor harvest in the price of corn, said Ben Handcock, executive vice president of the Wheat Quality Council, an industry association that sponsors the visits.

Kansas produced 16% of American wheat and is the country's biggest producer of hard red winter wheat, the variety that is ground to produce flour for bread. The price of this variety has nearly doubled since last summer, amid fears of low in stocks. If the crop in Kansas is worse than expected, the impact can raise the costs of both food manufacturers and restaurants.

"Everyone wants to give this poor harvest to make sure it's true," Handcock said.

High commodity prices have boosted the cost of flour, sweeteners based on corn and meat, among other products used by food manufacturers and restaurants. General Mills and Kellogg Co. have already increased prices in response to rising grain and other commodities. McDonald's Corp. is also readjusting prices and recently doubled the forecast of rising commodity prices in the U.S. this year to a range of 4% to 4.5%.

Kellogg, Sara Lee and Kraft Foods Inc. will disclose its results in parallel to the visits. The Sysco Corp., A major food distributor to restaurants, among other clients, will release results this week.

The cost of commodities should be a crucial factor for many food companies. For Kraft, "inflation expectations have increased the cost of commodities on the rise in cheese, meat and coffee," wrote analyst Alexia Howard of Sanford C. Bernstein in a report released last week.

The cereal maker Ralcorp Holdings Inc. and pasta to face pressure on the cost of commodities throughout the year, as well as they completed their hedges against rising prices, especially wheat, Howard said.

The officials and others who participate in the visits, known as crop scouts, will explore the fields to count the seeds and measure the plants in order to predict the average income before the harvest begins in a few weeks. The weather can influence the acquisition strategy of grain companies and forecasts of commodity prices. The group visiting the crops will disclose in order to estimate a fifth of the wheat crop in Kansas.

The collections of the U.S. southern plains, which occurs before other important crops such as corn and soybeans, can determine whether the rise in commodities is a distortion in one year or a persistent problem. The companies will probably have to pay more if the producers broadcast a lower yield than expected and there is a rise in the futures market.

Analysts now predict a significant loss of wheat crop because of drought that runs from southern Texas to Kansas and Colorado. Citigroup predicts that farmers will harvest 17.8 million tonnes of hard red winter wheat, a decline of 30% compared to last year.

"The Pizza Huts of life and everyone around will be looking," said Sid Love, analyst with Kropf & Love local brokerage Consulting.

When released the results last month, Yum Brands Inc., owner of Pizza Hut and other fast food chains, estimated that commodity inflation is expected to reach 7% this year.

Rising oil prices is also fueling concerns about the high price of agricultural commodities. The futures contract for gasoline last week reached the highest price in 33 months after Ben Bernanke, the chairman of the U.S. central bank, the Fed said the bank has no way to contain the rise of raw materials.

The Fed kept interest rates close to zero at its monthly meeting last week, and considered "transitional" to high oil, grain and cotton. Bernanke, in his first press conference ever held after a council meeting on monetary policy, noted that the growing demand for fuel in emerging markets and turmoil in the Middle East and North Africa have limited what the central bank can do to soften the rising commodity prices.