Drought in U.S: One Man's Pain is Another Man's Gain
Yashu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The current U.S drought could be one of the worst droughts in the U.S history in at least a few decades if this dry weather continues. The drought has already been known to destroy one-sixth of the expected corn production which in turn threatens to have an overall surge in global food price inflation. July was the hottest month in American history with soaring temperatures and a lack of rain across much of the country's agricultural land. It has made difficult conditions for farmers and ranchers which had reduced the corn and soybeans production as a result of which prices of these commodities have soared up.
Pain:
Pork, beef and poultry industries are all known to have a direct negative impact from the higher corn and soybean prices. Pilgrim’s Pride Corp. (NASDAQ: PPC) and Tyson Food Inc. (NYSE: TSN), two well known manufacturers of chicken products, have already taken a hit on their stock prices and are trading much below what they were trading at a couple of months back. Since poultry have a diet of generally soybean and corn, their higher costs would mean taking a large bite out of profits. Another company, Archer Daniels Midland Co. (NYSE: ADM) whose business engages in the ethanol production and grain-handling largely by using U.S produced grains have also taken a hit in its stock price. The situation turns no better for them unless the clouds shower some blessings on these companies.
Gain:
Corn prices have risen as much as 30% in the last two months but some companies are silently grinning and continue to benefit from the drought. Companies like Monsanto Co. (NYSE: MON), a seller of corn and soybeans seeds, are expected to sell more seeds after there has been a surge in the prices of these commodities. Another reason to smile for Monsanto is its victory of $1 billion over its arch rival DuPont in a law suit pertaining to patents in the agricultural seeds market. This victory should have an immediate impact on the earnings of Monsanto. Monsanto has also passed on this celebration onto its shareholders by announcing a 25% increase in its quarterly dividends from a prior payout of 30 cents to 37 cents.
Bunge Ltd. (NYSE: BG) is also one of the silent beneficiaries of the current situation. It has the same industry segment as that of the ADM, but is still cashing in on this drought scenario. The main reason being is that the majority of BG’s business operations are in South Africa and so it is in full control to benefit from the crop price increase as it is not dependent on U.S production for its supplies. Although the overall company performance of Bunge does not look quite bright, the benefit of the increase in crop price surely has a soothing effect on its revenue and earnings.
Impact on Customer:
Even if things get better from here on and the U.S does experience increased rainfall over the next few months, the benefit will be quite limited at this point of the growing season. Corn and soybeans consists of the major part of the U.S food supply. So, it won’t be long when the increased cost burden of the companies is passed on to the consumers and start to reflect in their food bills over the next several months. The price increase is expected over a wide range of food staples which include milk, eggs, beef, chicken and pork to name a few.
yashup 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.
