The statement said: “The impact on the food and beverage sector will be more muted because raw materials represent a smaller fraction of their costs, although subdued consumer demand and resistance from retailers to price inflation will compound the problem for this sector.
“The price rally has been driven by the US drought, primarily affecting production yields for corn and soybeans in North America. We believe the overall threat to corporates is mild, as weather-driven price shocks are often temporary – and prices could unwind on improved weather conditions. Tight supply of major grains and oilseeds associated with the drought is exacerbated by the high demand for food and protein from emerging economies, leading to tight stock-to-use ratios.
“Among the affected sectors, the downgrade of Abengoa to ‘B+’ from ‘BB’ last month was largely due to poor performance in its bioenergy business in Q112. We believe this segment will not see a meaningful recovery until mid-2013, as profitability depends on crush margins (the difference between the ethanol sales price and the input cost of corn). Bioenergy also has substitutes such as gas/oil that are not correlated to higher soft commodities; thus sustained high input costs for bioenergy make it less attractive relative to oil-based fuels.