Posted by Joseph Y. Calhoun, III

Chicken producer Pilgrim’s Pride filed for bankruptcy today. The cause? Volatile commodity prices. In the first half of the year, they were hurt by rising costs for feed and fuel (via Reuters):

The chicken industry has been hit hard by high costs for feed grain and fuel. Companies have been unable to raise chicken prices enough to offset these costs because a slowing economy has had consumers buying less.

In November, Tyson Foods, the No. 2 chicken producer, lost $91 million on chicken in its latest quarter but posted a small profit due to its beef and pork units.

So after getting hit by high commodity prices, they decided to hedge those costs. Bad timing:

Pilgrim’s tried to protect itself from even higher feed grain prices by buying grain in advance of use, a practice called hedging. Unfortunately, that hedging occurred right before grain prices tumbled, which left Pilgrim’s with a lot of expensive feed.

On Friday, the company said it lost $96.9 million in its fiscal quarter ended September 27 on such hedges.

The volatility of commodity prices is directly related to monetary policy. As I pointed out in my article, A New Bretton Woods, commodity prices have been much more volatile since the end of the Bretton Woods agreement which severed the dollar’s link to gold:

During the period of the pure gold standard from 1880-1913 (when the Federal Reserve was established) the standard deviation of commodity prices was roughly 4.5. During the free float period from 1914-1926 the standard deviation at least doubled (there are differences depending on which commodity index is used). During the Bretton Woods era from 1945 to 1971 commodity price volatility was reduced again to a standard deviation of about 8. Since 1971 volatility has again risen to about 15. (Cuddington and Liang 2003)

There are real consequences of a fiat money system beyond the obvious one of higher inflation. The volatility of commodity prices and exchange rates diminishes the capacity of companies to plan their business. How can you run a business when you have no idea what your costs will be over a reasonable period of time?

The losses from hedging this year have been staggering and have pushed at least two companies into bankruptcy. I highlighted the Vera Sun bankruptcy in an earlier post. While I don’t really mourn the loss of an ethanol producer that only existed because of government subsidies, neither of these bankruptcies had to happen. If we were on a gold standard, the need and desire to hedge would be greatly reduced.