The Difference A Year Can Make

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

Last year felt like Armageddon in the farming industry. One of the worst droughts ever in U.S. history gripped the Midwestern states and threatened the livelihood of the farming community. Suddenly, things are looking up and -- according to the U.S. Department of Agriculture -- farmers can prepare for their best year of income in four decades. Apparently the land needed to rest, and for months that was all it could do throughout the dry and sun-scorching conditions.

To be fair, last year was not the worst ever for farm income. Indeed, although harvesting was crippled commodity inflation served as a saving grace for many in the farming business, as prices for the short supply rose.

Now, prices for corn and soybeans are in free-fall even after soaring to record-high levels only months ago. Price reversals are occurring as a result of greater supplies. The USDA predicts that soybean inventories will rise to nearly 9% above year ago levels, and corn reserves are greater than previously forecasted as well. 

Food Stocks

Food companies, including Tyson Foods (NYSE: TSN), Sanderson Farms (NASDAQ: SAFM) and Smithfield (NYSE: SFD) faced higher prices for livestock feed, and that created some performance headwinds for these stocks.

In 2012, shares of Tyson were down nearly 30% in August compared with the beginning of last year. The stock eventually rebounded to finish the year close to where the stock began trading in 2012. In 2013, shares of Tyson are up 16% as investors continue down a volatile path with this stock.

The company characterized fiscal 2012 as "great" in its most recent shareholder meeting, despite the challenges.

Last year, Tyson had operating cash flow of $1.2 billion compared with $2.4 billion in gross debt. The company returned to investment-grade status among the ratings agencies, which bodes well for its future borrowing costs and is an improvement that is worth considering.

The effects from the positive shift in the agricultural conditions are already beginning to surface at Tyson. In its fiscal first quarter, Tyson reported a 14% jump in its earnings per share to $0.48. Through a 25% increase in its regular dividend plus a special dividend and share buybacks, Tyson returned $150 million back to shareholders in fiscal 1Q. Still, results would have been better were it not for $170 million in additional food costs during the first quarter amid the commodity inflation.

For the remainder of 2013, Tyson's plans for its cash flow include ongoing dividends, share buybacks, and expansion via acquisitions. Chief executive Donnie Smith says to expect top line sales growth of between 3%-4% going forward.

Hits Keep Coming

Corn and soybean meal are the chief feed ingredients that Sanderson Farms uses for its chickens. In 4Q corn prices rose nearly 12%, while the price for soybean meal increased nearly 40%. Were it not for a 7.7% increase in poultry prices, Sanderson Farms might not have had a profitable year. If poultry prices remain firm and feed costs stay at bay, the company should experience greater profit growth in 2013. Sanderson Farms pays a quarterly dividend of $0.17 for a modest dividend yield of 1.30%. At the end of fiscal 2012, the company had $896.5 million in assets and $150 million in long-term debt. Shares of Sanderson Farms are trading at about 7% below 52-week high levels.

Volatility Persists

Shares of  Smithfield Foods -- a company with a hybrid business that spans pork processing and packaged meats -- are trading at approximately 4% below their 52-week high. It's quite a recovery after shares dipped 26% below these levels in August 2012 just as the economy was reeling from 6% food inflation as a result of the historic drought.

Smithfield has an aggressive share buyback program in place, and over the past 18 months or so has repurchased more than 17% of the company's equity. Smithfield reports its fiscal 3Q earnings results on March 7. In its most recent quarter, Smithfield reported 2Q adjusted EPS of $0.61 vs non-GAAP earnings of $0.76 per share in the same period a year ago. Quarterly sales fell 3% to $3.2 billion amid a soft pricing environment for meat.

Last quarter, the company's results were impacted by charges associated with repurchasing and refinancing debt. The company is in the "final stages" of ridding its balance sheet of $1 billion in debt that has lingered since 2008, according to chief executive Larry Pope speaking on the fiscal 2Q earnings conference call.

Higher priced grains -- including volatile corn prices -- have pressured the live production segment of Smithfield's business lately. The company does have a hedging program in place for corn and pays just over $7 per bushel, which helped to curb losses stemming from hog production in the second quarter. Smithfield has the benefit of a consumer packaging business to offset weakness in its commodities business. The company expects its hog production unit to return to profitability by the 4Q 2013.

It's early in the year and weather and market conditions will change. Nonetheless, considering the improved outlook for grain prices and harvesting conditions, there could unrealized potential in shares of Tyson, Sanderson Farms, and Smithfield.


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Attractive Comps

One thing that shareholders can look forward to is that the year-over-year comparisons for food stocks are likely to be attractive as quarterly earnings unfold in 2013 merely as a function of commodity prices. Still, the stocks have proven to be vulnerable to the weather, and while food companies have emerged from last year's headwinds they still remain a volatile choice.

GerelynT has no position in any stocks mentioned. The Motley Fool owns shares of Sanderson Farms. 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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