Corn sold for $8 a bushel in 2012 as the Midwest suffered through a deep drought. This year, after the U.S. Department of Agriculture has predicting a record harvest, corn is selling, as of Dec. 3, at $4.29 a bushel.
Think that might mean a bit of leverage for producers of everything from pork to chicken as feed costs plunge?
The question, of course, is, have you missed the run, or is there more ahead?
The leverage on lower feed costs on pork and chicken producers is huge at some companies. About 45% of the cost of goods sold at Pilgrim's Pride is represented by grain, according to Credit Suisse. At Sanderson Farms (SAFM), grain accounts for 43% of the cost of goods sold. At Tyson Foods, that drops down to 11% (because chicken producers are the most corn-intensive of food producers). That projects out to a gain of $2.62 a share for Pilgrim's Pride in fiscal 2014, to $6.41 for Sanderson Farms and to $1.47 a share for Tyson Foods, again according to Credit Suisse.
Because of those huge swings on corn "leverage," the price-to-earnings ratios on these stocks aren't especially high, even after their big runs. Tyson Foods, for example, trades at 11.2x projected fiscal 2014 earnings per share. (The company's fiscal year ends in September 2014.) Pilgrim's Pride trades at 8.2x projected 2013 earnings per share.
That's not as cheap as it might seem, though. Wall Street gives companies that it regards as pure food commodity plays relatively low price-to-earnings ratios. Tyson's P/E for 2010-2012, for example, averages out to just 10.3x.
You've got three choices, I believe, if you still want to catch some of the profits from the plunge in corn prices.
First, you can go with a U.S. commodity producer such as Pilgrim's Pride in the belief -- which I think is accurate -- that not all of the drop in corn prices is yet priced into the stock. Farm commodity prices are extremely volatile, and projections for a record corn harvest are certainly subject to change.
Second, you can go up the food chain to look at a company that sells branded products. Shares of these companies have lagged the purer commodity plays. Shares of Hormel (HRL), for example, are up 50% in the last 12 months. Shares of branded producers historically sell at a higher P/E than do commodity producers -- Hormel now trades at 20.3x projected 2013 earnings per share -- but they also have less exposure in their cost structure to corn prices. Only about 6% of Hormel's cost of goods sold is represented by the cost of corn, Credit Suisse calculates.
Third, you can go outside the U.S. to chicken producers such as Mexico's Industrias Bachoco (IBA as an American depositary receipt in New York) or Brazil's more diversified BRF (BFRS as an ADR in New York). Industrias Bachoco's ADRs are up 54% in the last 12 months, but the ADRs still trade at just 9.1x projected 2013 earnings per share. BRF is up only 18% in the last 12 months as the Brazilian stock market has struggled against rising interest rates and falling economic growth. The shares trade at 27.6x projected 2013 earnings per share.
Of the two, I prefer the Mexican Industrias Bachoco, because it has more exposure than BRF to chicken production, and because the Mexican market and economy appear to be in better shape than those of Brazil as we head into 2014.