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PowerTrends in Food
09/22/2014 7:00 am EST
During the last four months, corn spot prices have fallen 30%; now the US Department of Agriculture is expecting a record corn harvest, explains Chris Versace in PowerTrend Profits.
Making matters worse, the USDA estimates China could be sitting on 150 million tons of grains such as rice, wheat, and corn. Per the data, that is double the 75 million tons of last year and adds to an oversupply of these agricultural commodities.
On one hand, those low prices are bad for farmers as it saps their income. On the other hand, falling input prices—commodity or otherwise—will, in all likelihood, lead to a better cost structure, including improved margins.
The potential for margin expansion is even better when a company benefits from falling input costs and prior price increases that were put in place to fend off the initial climb in input prices.
While there are a number of industries and companies that count corn as a major input, there are far fewer that are benefitting from the rise in food prices, protein prices in particular.
According to survey data by Consumer Edge Research, last month 36% of households earning more than $100,000 a year said food prices are negatively impacting their overall spending habits, up from 20% in January.
To capitalize on the food price pain and the drop in corn prices, my recommendation is for you to buy Pilgrim's Pride (PPC).
Not only is the company a pure play on the poultry industry, which has seen its prices climb far less than beef, pork, and shrimp, but feed accounts for 45% of its overall cost structure.
That means the drop in corn prices during the last few months will have a serious impact on the company’s margins and earnings in the coming months. As both of those climb higher, so too should the share price.
I also want you to step up to the plate today and buy Sanderson Farms (SAFM) shares. The key reasons are the continued upward climb in beef prices, jumping more than 50% over the last several quarters. In fact, beef prices climbed 10% in July alone.
But as I mentioned last week, we’ve seen a 30% drop in corn prices since early summer. Feed is roughly 40% of Sanderson’s cost of goods sold and the shares are trading at less than nine times 2014 earnings.
That large drop in costs also means there’s probably upside to existing 2015 earnings expectations. Let's get the jump on Wall Street and add SAFM to our holdings.
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