"Perfect Storm" Makes for Ideal Time to Buy Food Stocks
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A "Perfect Storm" of conditions has made for an ideal time buy stocks in the food sector such as Tyson Foods (NYSE: TSN), Smithfield Foods, Hormel Foods (NYSE: HRL), Kraft Foods (NASDAQ: KRFT), Coca Cola (NYSE: KO) and PepsiCo (NYSE: PEP).
The price of corn is up while those for fossils fuels such as oil, natural gas, and coal have fallen. Over the last quarter due to the drought in the Midwest farm belt of the United States, the exchange traded fund for corn, Teucruim Corn, has risen by 25.63%. For the same period, the exchange traded fund for oil, United States Oil, is down by 16.53%. Market Vectors Coal, the exchange traded fund for coal, is off by 24.80% for the last quarter of market action. For 2012, the exchange traded fund for natural gas, United States Natural Gas has fallen by 24.11%.
With corn higher, margins are lower for food companies, particularly for those in the meat sector such as Tyson Foods, Smithfield Foods and Hormel Foods. Corn provides the feed for the livestock that provide the meat for the end products (chicken for Tysons Foods, and pork and beef for both Hormel Foods and Smithfield Foods). As corn rises in price, the profit margin falls for Hormel Foods, Smithfield Foods and Tyson Foods.
For those that use corn syrup in products and other items such as Coca-Cola, PepsiCo and Kraft Foods, it is the same effect but not as pronounced for the soft drink beverages. However, PepsiCo, Kraft Foods and Coca-Cola do sell items that come from livestock that eat corn feed or are corn-based. These include Cadbury Dairy Milk for Kraft Foods and Frito-Lay Corn Chips for PepsiCo, among many others.
Due to the rising price of corn, these stocks have fallen in recent market action. Hormel Foods is down 3.71% for the week. Over the same period, Tyson Foods is down by 8.19%. Smithfield Foods is off by 5.88%; and Coca-Cola is down by 1.11%. But the drought will not last forever and corn will eventually fall from its record highs.
From those events, corn will continue falling due to collapse in the price of fossil fuels as corn ethanol will no longer be competitive as an alternative energy source. In addition, corn ethanol subsidies have recently ended. Declining global demand and increasing production, especially of natural gas, has greatly lowered the price already of oil, coal and natural gas; in addition to the overall appeal of green tech. According to a recent article in Wired magazine,"Clean Tech Meltdown" by Juliet Eilperin, the collapse in the price of natural gas alone has devastated the clean energy sector.
From her Wired piece, "Perhaps the biggest force working against not just Solyndra but clean energy in general is this: Because natural gas has gotten so cheap, there is no longer a financial incentive to go with renewables. Technological advances in natural gas extraction from shale – including the controversial practice of hydraulic fracturing, or fracking – have opened up reserves so massive that the US has surpassed Russia as the world’s largest natural gas supplier.”
Prices for food stocks have fallen due to higher price of corn cutting sharply into margins. For those that are dividend paying stocks such as Hormel Foods and Coca-Cola, the yields have been enhanced. But the share price decline for food stocks will not last forever. However, the unfeasibility of corn ethanol-based alternative sources will endure, particularly with the Federal subsidy gone. Utility companies in the United States are already switching over from coal to natural gas...and coal is a more efficient fuel than corn ethanol. For long term investors, the "Perfect Storm" has gathered to create an open season for buying these companies at reduced price levels for future profits.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola 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.