Corn Keeps the World Going, Let's Invest

Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Think that corn is just for eating, think again. This little miracle food is used for everything! It's the ethanol in the fuel that gets us to work and school, it's the food that our livestock eat, the key ingredient of many plastics and adhesives, there are even chemicals made from it. Oh, we can also eat it; let's not forget about that one. 

The one problem with corn is that it has to grow. It doesn’t just appear one day ready to be farmed, it takes time. Through the help of companies like Potash (NYSE: POT) and Monsanto (NYSE: MON), some farms have been able to keep their corn growing, even despite the horrendous drought that has been occurring in the corn regions of the United States. While the crops continue to grow with the help of chemicals, the cost per bushel continues to increase. In 2005 a bushel could be had for 250 cents ($2.50), we’re now looking at prices in the $7-8 range per bushel and it shows no sign of slowing.

The high prices per bushel mean that food production companies will eventually have to fork over the cash to continue operations. Companies like Tyson (NYSE: TSN) and Smithfield Foods (NYSE: SFD) who produce and market meat products are faced with higher feed costs. Consumers in the end foot the bill for all of these price raises. We end up paying more for the food, more for the gasoline to get it to us, and more for the plastic that it comes in.

Chemical Makers

Potash and Monsanto thrive in drought conditions. These two companies make a lot of controversial chemicals that get put into crops and result in higher crop yields. Of course, people don’t like chemicals being spread all over the things they eat and this is where both Postash and Monsanto need to tread carefully over the long term.

The chemical makers make their money by selling their fertilizing products to farms. They get more business when the conditions are like they currently are; drought ridden fields are prime for the fertilizing companies. Over time I think that both Potash and Monsanto will thrive. They will continue their research into safer, more effective means of fertilization, and help farmers create a better, higher yielding crop.

While dryer spells do come with more business for fertilizing companies, they do continue to make money in any climate. Monsanto has continuously grown their sales over the past decade, every single year. Potash suffered a big drop in the financial downturn but has continued to post big sales growth numbers over the period since 2008.

The chemicals also make very decent returns at Potash and Monsanto. The five year average net profit margin at Monsanto is at 15.3% while Potash actually blows it out of the water averaging 30.7% over the same time period. Potash also happens to be the king of efficiency with revenues of $1.43M per employee, beating out the industry and the S&P 500.

Food Makers

Tyson, Smithfield Foods, and their many counterparts have to buy corn and other crops in order to feed their animals. Droughts and increases in the cost of feed is troubling to both companies over the long term as they both have to increase prices on the consumer, or face lower margins which is out of the question as they're at rock bottom right now.

With the higher cost of feed that Tyson and Smithfield foods are facing they are forced to keep their prices in the store competitive, something that’s resulting in rock bottom margins for both companies. The average five year net profit margin for Tyson is just 1.1%, the same can be said for Smithfield Foods. These companies are also making only around $5000 per employee in profit. The S&P 500 on average has around $110,000 in profit per employee; this is definitely not where your money should be!

Bottom Line

If you want a black bottom line, and not that scary red color come year end, then you’d be better off avoiding the food makers Tyson and Smithfield Foods. Their margins are incredibly low which means that little slip ups are the difference between profits and losses.

Potash and Monsanto are two great companies for the long term investor and it’s really down to your own tastes as to who you should pick from the two. Potash has the better numbers for me, and the much lower P/E ratio, which is at 16.36 at the time of writing. 

 


Ash1402 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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