Make Tons of Money! Invest in the Higher Cost of Food! Do it Now!

higher cost of food

( not the Bunny Ranch )

Food prices must be going up, at least according to headlines.

The 101Centavos Gmail inbox runneth over Google’s news alerts set to the “rising food prices” keywords. What used to be maybe a weekly update, and mostly concerned with onion prices in India and Pakistan (onions must be a big deal there), now it’s a daily ping.

For example, from an American newspaper of record, the Wall Street Journal: Rising Food Prices May Cause Consumer Indigestion

From the BBC:  Affordable healthy diet ‘too expensive for many’

And forget about fast food:  Chipotle’s price hike may mean pricier burritos for steak lovers

Sure, grocery prices at the market are going up and up, with the root causes being both varied and predictable.  From California’s ongoing drought, to the reduction in the North American beef and swine herd due to past droughts, to a flatlining trend in agricultural productivity as measured in harvest yields (itself somewhat due to a shortage in farm labor).

One more article from Old Blighty:  UK Farm Income Boosted From Rising Potato to Livestock Prices, where income in this case, allowing for the usual journalistic tendencies for headline legerdemain, actually means gross revenue, not profits.  Let’s quote from the article, with emphasis added:

The value of income from all crops, without accounting for production costs, rose 3.7 percent to 9.29 billion pounds, while production values in the livestock sector increased 8.5 percent

Yes, by all means, let’s not account for production costs, what?

Which brings us to the meat of this blog post, in that a week or two ago the inbox was titillated by the prospect of stock market riches and early retirement through investment in the higher cost of food.

Courtesy of Nasdaq news wire and Kapitall:  Food Prices Are Going Up For Just About Everything; Are There Ways To Profit?

The winter’s strange weather has driven up food prices. Is there a way to profit from this trend? … If you’ve tried to order a margarita or Thai food in the last month, you probably suffered a rude awakening to the lime shortage that is currently ravaging Mexico and, by extension, its eateries abroad. But that’s only the beginning.

Ways to profit wildly in food?  Not so very much, unless you own the means of distribution and value-adding.

Fat Stacks, Yo!

 
Since prices for “coffee, pork, oats and corn” are going to the moon on a habanero-and-brisket-powered rocket, Kapitall tempts to consider investing (or at least “begin our analysis“) in the following companies:

Sanderson Farms, Inc. (NYSE: SAFM).  A chicken producer, in the same league as Tyson and Pilgrim’s Pride.

Archer Daniels Midland Company (NYSE: ADM).  The business description from Kapitall is almost benign in its neutrality:  Archer Daniels Midland Company procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. [1]

The Andersons, Inc. (NYSE:  ANDE).  An agricultural distribution company.  Silos, railcars, and whatnot.

Industrias Bachoco S.A.B. de C.V. (NYSE:  IBA).  Mexican chickens and chile relleno.[2]

All of these companies are mildly profitable, in the single digits of net income,  although perhaps as in the case of ADM, this might be accomplished through creative accounting to minimize the federal tax bite.   Solid price to earnings multiples, good price-to-book ratios.  So-so returns on equity.

Why these four companies?  To quote again from the article, because they have cash on hand:

Stocks with more cash on hand will be more flexible in dealing with the crisis. Like Starbucks scaling back their coffee purchases, having extra money gives firms extra leeway to take advantage of price fluctuations.

In other words, they’ll be able to buy more when prices are low, and stop buying when prices get high. We screened 60 stocks in the food and agricultural industries for high ratios of levered-free-cash flow to enterprise value (LCEF/EV).

Well yes, cash is king, but an agricultural company could also be very clever with hedging and playing the futures market.  It’s what they have to do in order to survive. Tyson Foods, for example, didn’t make the cut, but its stock performance over the last year has outshone all of the above and also kicked butt versus the Dow Jones.

 

Costs are going up, but not necessarily profits, unless of course we just don’t account for production costs, as so breezily dismissed by the the British article referenced earlier on.  Still, having written in the past about the profitability of  small food producers before, perhaps a closer look at giant agricultural companies is warranted.

 
But not today.   Eight hundred words and counting on this post, way past the attention span of the casual internet surfer.   Thanks for dropping and visiting. And just when is that post on robotics coming up? Until then, the normal entreaty to subscribe: Email and/or Twitter .
 
[1] Well, that’s nice.  How about an alternate:  The company is vertically integrated in the production of the profitable and addictive drug of high fructose corn syrup, and its various derivatives such as dextrose and maltodextrin.  Not to be overly judgmental, since we invest in tobacco companies, but let’s not whitewash what ADM actually does.

[2] Not really, IBA is just a smaller version of Tyson and Sanderson Farms.

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Comments

  1. In investing higher cost of food, you can really make tons of money? Woah! That’s cool.
    Hannah @ Wise Dollar recently posted..Three Simple Ways to Save Money

  2. LOL! Semi-Demi-Exboyfriend (the famed SDXB) likes to buy food in quantity whenever he finds it on sale. He calls this “investing in food futures.” And he really does eat well on the very cheap.

    On the other hand, it leads him to buy what I used to call “Klingon food.” If something was on sale, he’d buy it whether we were likely to eat it or not. Hence, stacks of canned Jello-like cranberry sauce (ick!!!!) taking up space in the pantry.
    Funny about Money recently posted..The Art of Daily Living: Frugal New Shorts

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