Lower Grain Prices of No Benefit to Packaged Foods Stocks
The Food Processors group is underperforming despite a decrease in crop price.
Many investors assume a Newtonian clockwork response in commodity-linked equities. The assumption is rising prices for commodities sold should push the price of producers’ stocks higher and vice versa for consumers’ stocks and lower commodity prices. Were it only the case; not only are the stocks affected significantly by their beta to the market as a whole, management issues, interest rates, and exchange rates, investors at the margin tend to do a very good job of discounting short-term commodity price volatility and focus instead on long-term smoothed trends. Moreover, commodity feedstock costs often represent a smaller portion of total costs than assumed. No one denies the importance of jet fuel prices for airlines, but even these take a (cramped) backseat to labor costs.
The recent experience of the S&P Packaged Foods group, whose members include ConAgra (NYSE:CAG), General Mills (NYSE:GIS), Hershey Co (NYSE:HSY), Tyson Foods (NYSE:TSN), and Kraft Foods Group (NASDAQ:KRFT), inter alia, provides a case in point. I forecasted in July 2012 that drought-induced higher new-crop corn and soybean prices would depress this group’s performance relative to the S&P 1500 Supercomposite (INDEXSP:SP1500). They did, briefly, by 6.63% between late June and mid-September, before grain prices themselves stopped soaring.
Where are we today? New-crop corn prices have tumbled in 2013 as farmers responded to last year’s high prices by increasing plantings. New-crop corn at Memphis, Tennessee, has declined 33% since December 2012; new-crop soybeans at Osceola, Arkansas, have declined 13.5% over the same period. The Packaged Foods group has underperformed the broad market by 0.12% since then, and we are seeing stories such as Kellogg (NYSE:K), the breakfast cereal maker and an iconic company, reducing its workforce by 7% to save costs.
The map of relative performance since January 1998 reveals something else: The two periods where Packaged Foods’ relative performance increased rapidly were the two great bear markets of 2000-2002 and 2007-2009. Relative performance rose not as a function of these stocks doing absolutely well but rather as a function of other stocks in more discretionary and income-sensitive industries doing poorly.
You have to eat, yes. However, this does not make a generally defensive industry group a good all-weather investment. Finally, if you want to trade corn or soybeans, trade them directly via the futures market and not indirectly in the stock market.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.