The Hard Facts About Food Commodity Inflation: ADM, CAG, BG, K
ConAgra Foods, Archer Daniels Midland, The Kellogg Company, and Bunge are poised for a good multi-year run.
Though the trend's been in place since June of last year, it hasn't rattled investors until the last couple of weeks. On the other hand, if the experts are right, it's still just the beginning of the trend. And what trend is that? Rising wheat, corn, and other farm-related commodity prices that has stemmed from shrinking reserves.
Investors have taken notice too, for better or worse. ConAgra Foods (CAG) shares plunged beginning on January 26th on a report of higher costs and lower demand. Kellogg Company (K) shares plunged on the same marketwide news in late January, only to soar to higher highs just a couple of weeks ago. Archer Daniels Midland (ADM) gave us the same pattern in the same timeframe, while Bunge Ltd. (BG) has seen nothing buy buying since the media put the news in the popcorn popper late last month.
Four very comparable companies that should all be experiencing pretty much the same thing, yet at least tree very different responses from investors. Clearly there's some confusion here about whether this is good or bad for food companies like BG, ADM, CAG, or K. So, a look at the actual numbers is on order.
In a recent interview with Bloomberg, Sanford C. Bernstein analyst Alexia Howard stated "History shows us that food stocks tend to underperform the market as commodity costs rise, since gross margins are crushed." That assumption seems to jive with the persistent selling of ConAgra Foods, and even explains the bearish knee-jerk reactions with Archer Daniels Midland and the Kellogg Company. Unfortunately, it's not really an accurate assumption. The folks who've been buying Bunge Ltd. since the food supply/demand dynamic has spirited prices higher have the right - and numerically supported - idea.
The fact is, food growers and food producers pass along all the rising costs of food to buyers... and then some.
Take the middle of 2008 for example, when corn prices soared to record highs around $750. The ended up being one of The Kellogg Company's most profitable quarters ever (at the time), and the company didn't even flinch - even is it wanted that it would.
In Q1 of 2008, wheat prices were going through the roof, hitting $1275 at one point.... an all-time record. Not only did higher input costs not crimp Bunge Ltd's profits, the second quarter of that year was stunningly profitable for Bunge.
Archer Daniels Midland also had a great showing in 2008 - as if food prices weren't even spiking - and ConAgra Foods put up a profit that year that still hasn't been topped.
And if you dig far enough back in history, you'll find that the 1996 spike in wheat and corn prices also proved to be very good things for these food suppliers.
So, the question is, how exactly do margins suffer when we see food inflation? The numbers seem to indicate quite the opposite, as those higher costs and a little something extra actually seem to get passed along to consumers.
Better still, at least to long-term investors, is that the current food commodity rally is expected to persist for much linger than the prior spikes did. The 2008 food inflation run was a side effect of the beginning of a recession and fertilizer companies that just didn't want to accept that. This time, the global economy's in a recovery mode that can actually pay higher food prices... even if consumers don't like it. Some analysts think this is a trend that can be sustained for years, which means ConAgra Foods, Archer Daniels Midland, The Kellogg Company, Bunge, and all the rest are sitting pretty even if they're grumbling about rising input costs.
Investors have taken notice too, for better or worse. ConAgra Foods (CAG) shares plunged beginning on January 26th on a report of higher costs and lower demand. Kellogg Company (K) shares plunged on the same marketwide news in late January, only to soar to higher highs just a couple of weeks ago. Archer Daniels Midland (ADM) gave us the same pattern in the same timeframe, while Bunge Ltd. (BG) has seen nothing buy buying since the media put the news in the popcorn popper late last month.
Four very comparable companies that should all be experiencing pretty much the same thing, yet at least tree very different responses from investors. Clearly there's some confusion here about whether this is good or bad for food companies like BG, ADM, CAG, or K. So, a look at the actual numbers is on order.
In a recent interview with Bloomberg, Sanford C. Bernstein analyst Alexia Howard stated "History shows us that food stocks tend to underperform the market as commodity costs rise, since gross margins are crushed." That assumption seems to jive with the persistent selling of ConAgra Foods, and even explains the bearish knee-jerk reactions with Archer Daniels Midland and the Kellogg Company. Unfortunately, it's not really an accurate assumption. The folks who've been buying Bunge Ltd. since the food supply/demand dynamic has spirited prices higher have the right - and numerically supported - idea.
The fact is, food growers and food producers pass along all the rising costs of food to buyers... and then some.
Take the middle of 2008 for example, when corn prices soared to record highs around $750. The ended up being one of The Kellogg Company's most profitable quarters ever (at the time), and the company didn't even flinch - even is it wanted that it would.
In Q1 of 2008, wheat prices were going through the roof, hitting $1275 at one point.... an all-time record. Not only did higher input costs not crimp Bunge Ltd's profits, the second quarter of that year was stunningly profitable for Bunge.
Archer Daniels Midland also had a great showing in 2008 - as if food prices weren't even spiking - and ConAgra Foods put up a profit that year that still hasn't been topped.
And if you dig far enough back in history, you'll find that the 1996 spike in wheat and corn prices also proved to be very good things for these food suppliers.
So, the question is, how exactly do margins suffer when we see food inflation? The numbers seem to indicate quite the opposite, as those higher costs and a little something extra actually seem to get passed along to consumers.
Better still, at least to long-term investors, is that the current food commodity rally is expected to persist for much linger than the prior spikes did. The 2008 food inflation run was a side effect of the beginning of a recession and fertilizer companies that just didn't want to accept that. This time, the global economy's in a recovery mode that can actually pay higher food prices... even if consumers don't like it. Some analysts think this is a trend that can be sustained for years, which means ConAgra Foods, Archer Daniels Midland, The Kellogg Company, Bunge, and all the rest are sitting pretty even if they're grumbling about rising input costs.
Bryan Murphy is a paid contributor of the SmallCap Network. Bryan Murphy's personal holdings should be disclosed above. You can also view SmallCap Network's complete disclaimer and disclosure.
Advertisement
Advertisement
