A thesis with no winners, just losers. That's this crop burnout thesis in a nutshell. The high and many-think-going-higher crop prices are playing havoc with what had been a terrific deflation theme: the food companies.
At the same time, trying to profit off it short of buying corn futures has been somewhat futile at this point. You can only buy so much Monsanto (MON), or Deere (DE) or Potash (POT) before you are trapped by worldwide concerns. And there's an understanding that farmers aren't going to rake in money over a drought because they don't sell as much as they would if corn prices were driven up by some insanity, like burning our food supply as an alternative to gasoline.
Today we got the worst sign yet that this harvest is slaughtering the best ones now, the downgrade of Dean Foods (DF) to Hold from Buy at Goldman Sachs. Dean Foods is still up 32% for the year, and it has been a remarkable turnaround. But this $14 stock traded as high as $17 not long ago, as the raw cost of dairy plummeted while the ridiculous price-cutting that had gone on in the dairy aisle to bring in customers had, at last, abated.
Now the raw costs are moving up swiftly, so Dean is losing the big margin expansion prop that had buoyed its shares and made it a favorite of so many, including me.
Any stock up 30% in this environment is a candidate for profit-taking, and Dean is no different -- especially if, like me, you keep hearing the run in commodities isn't over yet.
But when you do take profits, remember, there are two Dean Foods: there is the commodity play, and then there is the specialty organic division, with an emphasis on soy and almond-based, milk-like products.
In the years since Dean hit hard times it has restructured its balance sheet, boosted sales of its organic Horizon brand and really put a ton of emphasis on the natural foods aisles, with products that look more like Whole Foods (WFM) and less like heavy cream.
So, sure, try to beat the sellers. I get that. But remember that crop prices don't always stay high. This is not the levered, hurting Dean, but a very strong company that will bounce back and perhaps go to new highs by next crop season.