Agriculture, Food And The Recent Floods

Flooding caused by last week’s storms will force many farmers to choose between replanting new corn crops, planting soybeans or opting for insurance. Due to seasonal factors, the decision will have to be made quickly, particularly for those who want to replant corn.

The USDA had cut its corn harvest forecast as recently as a week ago, before the rains soaked Iowa. On Monday afternoon, the agency estimated that 57% of the corn crop was in good or excellent condition.

Not surprisingly, corn futures continue to hit new records. For investors, the higher corn prices bring both opportunities and risks.

Opportunities in Agriculture

Farmers will replant some crops; this is a certainty. The replanting process will likely further increase demand for fertilizer. This may partially explain why the second-quarter earnings estimate for Agrium (AGU) has jumped 56 cents within the past seven days to $3.06 per share. AGU is Zacks #1 Rank (”strong buy”) stock and is classified in Fertilizers.

Seeds and other agricultural products will also be needed. This should bode well for Monsanto (MON). One analyst just raised his second-quarter forecast to $1.37 per share from $1.29 per share. The consensus estimate calls for this Zacks #1 Rank company to earn $1.35 this year.

MON is classified in Agricultural Operations. This group also contains The Andersons (ANDE), which operates grain elevators in Ohio, Michigan, Indiana and Illinois. (Rivers in Illinois may not peak until later this week.) ANDE stores corn, wheat and soybeans. The company also does a sizeable business in fertilizers and other plant nutrients. Though the second-quarter and full-year consensus estimates have been rising, there have been no revisions within the past seven days. Therefore, while ANDE may offer upside, investors may want to keep a close on eye on whether the next set of revisions are positive or negative. ANDE is a Zacks #2 Rank (”buy”) stock.

Higher Food Prices Ahead

The biggest fallout from the flood will be food prices. Higher corn and grain costs will make livestock more expensive to raise. There is some scuttlebutt that livestock population will be intentionally brought down as farmers will be forced to determine whether or not they can afford to maintain the size of their current herds. Sanderson Farms’ (SAFM) CEO, Joe Sanderson, Jr., observed in his company’s recent earnings release that egg sets are down from year ago.

The question facing investors is whether meat and dairy companies will be able to offset the higher feed costs through price increases and cost-cutting. Revisions made during the past 30 days are mixed. The full-year consensus earnings estimate for poultry producer SAFM has been revised upwards, while the consensus earnings estimate for SPAM maker Hormel (HRL) has been cut. (Both companies reported earnings in late May.)

In regards to cattle, fiscal 2008 profit forecasts for Tyson Foods (TSN) were cut within the past 30 days. The consensus earnings estimate for dairy conglomerate Dean Foods (DF) is unchanged over the past 30 days.

Processed food companies should also be affected, though analysts have not made many adjustments to their forecasts recently. For example, full-year forecasts for Kellogg (K) are unchanged, while one analyst lowered his projections for Kraft (KFT) and two brokerage analysts raised their fiscal 2009 estimates for General Mills (GIS), pushing the consensus estimate higher by a penny.

There have been some revisions to beverage companies. Coca-Cola Enterprises (CCE) lowered its second-quarter guidance at the end of May citing “weakening economic trends”, which has caused some analysts to look less favorably on other soda-related companies. Notably, CCE did not cite the higher cost of ingredients, though clearly some customers are becoming more price sensitive.

SAFM is a Zacks #1 Rank stock. GIS and TSN are Zacks #2 Rank stocks. (Although fiscal 2008 estimates for TSN have been revised down, fiscal 2009 estimates have been revised upwards and the company exceeded fiscal second-quarter expectations.) DF, HRL, K and KFT are Zacks #3 Rank (”hold”) stocks. CCE is a Zacks #4 Rank (”sell”) stock.

CCE is classified in Beverages-Soft Drinks. DF is classified in Food-Dairy Products. GIS, K and KFT are classified in Food-Miscellaneous/Diversified. HRL and SAFM are classified in Food-Meat Products.

It may take several weeks or months for the recent flooding to influence food and beverage company profit margins. Investors should monitor both trends in earnings estimate revisions and profit margins to determine whether or not companies are able to offset the higher costs.

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