Good News Drives Corn Down

 | Jun 14, 2013 | 6:00 PM EDT  | Comments
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safm

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iba

Corn prices look likely to end this week with the biggest monthly drop since April. Corn futures   for delivery in December tumbled to $5.32 a bushel as of 1 p.m. Friday. Goldman Sachs cut its forecast to $4.75 a bushel from $5.25. Earlier this year, corn traded around $7 a bushel.

Good news about this year's harvest has driven prices lower. The U.S. Department of Agriculture is forecasting that this year's harvest could hit 14.005 billion bushels, a 30% increase from last year's drought-reduced harvest. The U.S. harvest would boost global production by 12% to a new record.

All of which is great news from the companies that turn corn into protein. And no group of companies is likely to see a bigger bounce from lower corn costs than global chicken producers.

The high cost of corn used in feed has led chicken producers to cut back the size of their flocks.

The USDA and Tyson Foods (TSN) are projecting a 2% to 3% increase in poultry production for 2013 as feed prices come down, but that's likely to be optimistic given big reductions in the size of breeding flocks. A lag in increases in production means chicken prices are likely to stay relatively high -- when feed costs are falling that's a recipe for rising profits at chicken producers.

And chicken producers are likely to see another edge in the next quarter or two. Beef and pork producers have also cut the size of their herds due to high feed costs. With corn prices falling, those producers will be looking to increase the size of their herds but it takes far longer to increase beef or pork production than it does to increase chicken production. That's likely to give chicken a short-term price edge that will lead to an increase in chicken sales as consumers substitute relatively cheaper chicken for relatively more expensive beef and pork.

Tyson Foods is the biggest U.S. chicken producer but it isn't a pure chicken play since the company has expanded into beer and pork. A U.S. pure play is Sanderson Farms (SAFM), the third largest U.S. chicken producer. (Pilgrim's Pride is No. 2 among U.S. producers but it is now a subsidiary of Brazil's JBS, the world's largest beef producer.)

Among global producers, Mexico's Industrias Bachoco (IBA) and Brazil's BRF offer relatively concentrated chicken exposure.

Industrias Bachoco is Mexico's largest poultry producer (and its No. 2 producer of eggs) with a 35% share of the Mexican market chicken market and a 10% share of the egg market. In 2011 the company bought OK Industries, a U.S. chicken producer to increase its market share in the United States.

BRF is Brazil's second largest food company by revenue and the 10th largest food company in the world. About 34% of sales in the first quarter came from poultry. BRF's fastest growth is coming from exports, where sales climbed 31% in the first quarter.

We're currently in the midst of a substantial drop in emerging market stocks. I don't think this retreat -- which has grown to an official correction in Brazil's markets -- has yet run its course. I'd hold off on Industrias Bachoco and BRF for a few weeks yet -- you might be able to get the New York traded ADRs at very attractive prices.

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