General Mills Is Confident, Are You?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I live out in the country, away from the hustle and bustle of the cities. It's peaceful out here, and it gives me an appreciation for how the weather can affect crops since I have to pass by several farms whenever I plan on going anywhere.
Up until this week I've felt the same punishing heat as the local farmers every time I've stepped outside and looked up with dismay at cloudless skies that for weeks on end offered no hope of rain. Every trip I've taken to town has taken me past field after field of corn and other crops that were drying out or relying on massive irrigation systems to keep growing. This scene has been repeating itself on farms across the country, and companies that rely on these farmers for raw materials have started feeling the pinch as corn prices have started rising significantly.
General Mills Inc. (NYSE: GIS) would be one such company, relying on corn and other agricultural products for its cereals and many of its other food products. They've definitely taken notice of the problems caused by the widespread drought conditions in the heartland and midwest, with CEO Kendall Powell noting on CNBC's "Squawk on the Street" that cereal sales have slowed in Europe and parts of the United States due to consumers being "pretty cautious" in regard to their purchases. When you look at the numbers, though, General Mills doesn't seem worried at all... they're actually predicting that the new fiscal year will be easier on them cost-wise than fiscal year 2012 was. If this seems surprising in light of the recent spike in corn prices then there are two things that you need to realize.
First of all, General Mills has a lot more going for it than cereal. In truth, only 5 to 10% of their input costs go toward corn and other grains. Even more important than this, though, is the fact that over half of the corn that General Mills will use in the next fiscal year was locked in prior to the corn spike. While the company will still be affected somewhat by the higher cost of corn, the fact that they've already locked in lower pricing on so much of their corn means that input costs will likely only increase by 2 to 3% as a result of the drought and corn shortages.
General Mills' confidence is helped along by the expansion of some of its other product lines. Another 50 Haagen-Dazs stores are set to open in China this year, bringing the total in that country to 255, and the company is planning on stepping up its efforts to get Yoplait back to the top of the yogurt food chain. A new six-ingredient yogurt named Simplait is being released, a fruit-heavy yogurt named Fruplait will debut that features twice the fruit of other yogurts, and new versions will be added to the Yoplait Light and the Liberte Greek yogurt brands as well. All told there will be 40 new yogurt products and flavors introduced in the next year, with 35 of them being planned for release within the next six months.
So it's easy to see why General Mills is confident. Between locked-in prices and a large focus in other areas, the company is likely going to have a strong year despite the increase in corn costs. Are they alone in this confidence, however? Is General Mills' potential success in light of rising corn costs a fluke?
Not really. Other companies that require corn for their products such as ConAgra Foods (NYSE: CAG) and Post Holdings Inc. (NYSE: POST) seem to be doing fairly well in spite of increased corn costs as well. As with General Mills, these companies offer a diverse line of products that don't all rely on corn to manufacture. When you factor in the dropping price of sugar and the likelihood that rice prices will drop if the Thai government is going to start selling off some of its rice stockpiles as expected, the higher price of corn isn't going to have a major impact on the products that these companies produce.
This isn't to say that no one is suffering as a result in the damage done by the widespread droughts. The Archer Daniels Midland Company (NYSE: ADM) has taken a beating in the market since its prices peaked in May, seeing losses of nearly $6 per share in two months' time. It's still trading higher than its 52-week low, however, and is large enough that it can absorb at least some of the rising corn costs in hopes of continuing late-season rain and a stronger crop next year. While this year will be tough for ADM, investors who hold on to their stocks will likely find that ADM can weather this rough growing season without much in the way of long-term negatives.
Smaller companies may have more trouble this year with the damage that the drought has done to the cornfields, but despite commodity concerns there isn't a huge reason to panic yet. A larger concern should be for the farmers themselves who are seeing their livelihoods drying in the fields and some of whom may find this drought season too much to bear.
John Casteele has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. 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. If you have questions about this post or the Fool’s blog network, click here for information.