August 1, 2012 / 2:03 PM / 5 years ago

UPDATE 3-Maple Leaf Foods sees multi-year food inflation from drought

* Meat, bread price increases seen for 2013

* Food companies likely to pass along full cost to consumers

* Shares jump on better than expected Q2 profit

* CEO seeks lead time if Canada changes supply management

By Rod Nickel

Aug 1 (Reuters) - Drought in key crop-growing regions of the United States is "highly likely" to usher in several years of food-price inflation, as companies pass on to consumers the cost of sky-rocketing grain prices, the chief executive of Canada's Maple Leaf Foods said on Wednesday.

Hot, dry conditions in the U.S. Midwest have scorched this summer's corn and soybean crops, and also driven up prices of wheat and other grains. Those higher prices have in turn pushed up the costs of producing a variety of foods, including Maple Leaf's pork, poultry and baked goods.

"It affects the entire food chain for sure," said Michael McCain, CEO and the biggest shareholder of Maple Leaf, in an interview with Reuters.

"It's very premature to illuminate any precision of what that impact might be, but it certainly has the potential to extend a couple of years."

Maple Leaf, one of Canada's biggest meat processors and bakers, reported a higher second-quarter profit on Wednesday, sending its shares up 5.4 percent, or 54 Canadian cents to C$10.54, on better than expected results.

But Maple Leaf shares have plunged by almost one-fifth since late April, touching a nearly two-year low earlier this week as the drought grew more severe since farmers planted crops in spring.

Wheat is a key cost in the baked goods Maple Leaf produces, and grain prices are also an important factor in the cost of raising pigs. Benchmark Chicago wheat futures last week hit their highest level since 2008, the last time soaring grain prices stoked food inflation concerns.

McCain said the drought will likely force Toronto-based Maple Leaf to raise store-shelf prices in 2013 on many of its products, which include Schneider's meats and Dempster's bread, as it looks to pass the full cost on to consumers.

"Food companies operate on extraordinary thin margins," he said.

Consumers are likely to respond to rising grocery prices by seeking out bargains, he said, rather than buying less food.

The World Bank warned on Monday about the potential impact of short-term food price spikes on the world's poor.

Shares of U.S. meat-processing rivals Smithfield Foods Inc , Tyson Foods Inc and Hormel Foods Corp have also slumped since spring, while Canadian food company George Weston Ltd's stock has also dropped.

Maple Leaf last year adopted a shareholder rights plan and McCain himself upped his stake to nearly one-third. He said the company has not been approached about a takeover in the past year and is focused on its C$560 million plan to upgrade its meat operations.

Maple Leaf's poultry operations run under Canada's so-called supply management system, which regulates production of poultry, dairy and eggs and imposes high tariffs on imports.

That system has come under fire from some trading partners, such as the European Union and New Zealand, as Canada tries to negotiate trade pacts with the EU and Trans-Pacific Partnership.

McCain said supply management is a "very important social policy for the government" and Maple Leaf is prepared to operate under either the status quo or a liberalized system.

"But whatever scenario we end up with, we would ask for lengthy transition times if it's any change."

Maple Leaf's second-quarter net earnings rose to C$32.5 million ($32.5 million), or 21 Canadian cents per share, from C$24.6 million, or 17 Canadian cents, a year earlier, as the company reaped the benefits of price increases for some products and an ongoing effort to modernize its meat operations.

Excluding items, earnings per share fell to 28 Canadian cents from 30 Canadian cents. Analysts on average had expected 23 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose about 2 percent to C$1.26 billion, in line with analysts' estimates.

Maple Leaf's bakery unit, Canada Bread Co Ltd, reported net earnings of C$26.8 million on Wednesday, up 80 percent from the weak year-earlier quarter, because of larger sales volumes and price increases.

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