The Patty Gets Flipped
What happened to foster such a big, bullish reversal of fortune for the meat industry? Well, it’s not so much what happened, but what didn’t happen.
What didn’t happen was the end of the world, proverbially speaking. Corn prices eased off to $6.80 per bushel by the end of the year, and shares of Hormel, Tyson and the others all started to recover. It was a tepid rebound, however, and it was clear investors remained hesitant to trust that corn prices would remain low, let alone keep falling.
Big mistake. As I wrote then:
“A good crop — or even just more rain — in 2013 could make this year’s corn crunch nothing more than a fading and irrelevant memory in the near future. But, to the extent we can look at the future, yes, there’s more upside in the cards for the meat industry. We have to assume rainfall will return to normal next year, and we have to assume all four of these names will reach their slightly elevated target growth levels in 2013.”
Sure enough, not only is the nation not dealing with a drought this year, but 2013’s nationwide rainfall is ahead of the norm in many regions. Corn’s growing just fine. In fact, it might be growing a little too well.
While farmers and meat producers had no particular reason to expect another drought in 2013, the echoes of 2012’s dry spell were still ringing as this year’ growing season began. Corn prices were holding right around the $6.60 per bushel level through Q2. In early July of this year, however, the USDA reported that much more corn had been planted in the United States this year than initially expected … about 2% more, to be precise. It’s a huge disparity by nationwide crop standards.
The end result: Corn prices fell overnight from $6.85 per bushel to $5.32. In the meantime, corn has continued its slide all the way to $4.72 per bushel.
Meat producers are loving the glut.
As enticing as big gains are from any equity, the rally in meat stocks has clearly been produced by a plunge in feed grain prices that was just as violent as 2012’s unbridled rally. Like that rally though, this plunge wasn’t built to last.
That’s not to say corn prices are going to make a beeline back to $8 per bushel. That’s not even to say corn won’t edge a little lower before it’s all said and done. It is to say, however, that meat stocks have already realized the bulk of their potential, and don’t offer enough upside from here to risk the downside inherent given the current situation.
In other words, take the money and run.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.