To say that there is a bumper crop of corn might be an understatement.
The U.S. is in the midst of one of its best crops in years. There’s so much corn that according to Bloomberg News, stockpiles of the grain are growing at their fastest rate in nine years. The U.S. Department of Agriculture recently raised its forecast for the corn crop to 14.03 billion bushels, an increase from the 13.86 billion bushels forecast in July. The 2013 harvest was 13.93 billion bushels.
Since supplies are outstripping demand, corn prices are plummeting and have slumped more than 20% year-to-date. Bob Young, the chief economist for the American Farm Bureau, told InvestorPlace that prices may slump even further in the coming months.
For investors, there are a few ways to look at the good news, over both the short and longer term.
Archer Daniels Midland (ADM)
YTD performance: +14%
Connection to corn prices: Although Archer Daniels Midland (ADM) is best-known to city slickers for its connection to ethanol, it makes a plethora of corn-based products such as corn sweeteners and animal feed.
ADM’s most recent quarter was a barnburner. Profit more than doubled thanks to low corn prices and plentiful supplies of soybeans. It easily surpassed analysts’ expectations. Though some farmers are storing their corn as prices continue to plummet, that will have a minimal impact on ADM since supplies are so plentiful.
Meanwhile, U.S. ethanol exports surged 54% in the first half of the year and should continue on their torrid pace as long as prices remains stable. Although ADM stock currently is only trading a few percentage points under analysts average 52-week target of $51, some analysts think it can do better. Argus recently hiked its ADM price forecast to $57, while analysts at Zacks think the stock could hit $60.
YTD performance: +13%
Connection to corn prices: Tyson (TSN) is one of the world’s leading processors of chicken, beef and pork. If you’re a person who just think meat comes from the supermarket, you might not realize is that these animals actually need to eat something before they’re converted into buffalo wings, burgers or sausages.
That something is corn.
The grain is a huge part of Tyson’s costs, so when corn prices are down, TSN’s profits go up. In fact, Tyson reported $460 million in savings on its feed costs this year and may do better next year if prices remain stable.
Wall Street analysts are bullish on TSN, with an average 52-week price target of $46.13 — some 20% higher from here — and targets as high as $48 from KeyCorp and $50 from BMO Capital Markets. That’s some unusually high sentiment from analysts for a stock that missed earnings forecasts in the most recent quarter.
YTD performance: +12%
Connection to corn prices: Hormel (HML) — maker of products such as Jenny-O turkey, Dinty Moore Stew and of course Spam — is affected by corn prices because it buys hogs and turkeys for its processing plants.
HML reported better-than-expected results earlier this week, as a deadly virus that decimated piglet populations appears to be on the decline. Lower corn prices are certainly helping their turkey business heading into the holiday season, too.
Analyst targets are actually right near Hormel’s current price, and HRL stock does trade at 20 times next year’s earnings, so while Hormel is attractive, it’s better bought on a pullback.
Dean Foods (DF)
YTD performance: -7%
Connection to corn prices: Most milk produced in the U.S. comes from dairy cows that are fed corn. Dean Foods (DF) recently withdrew its 2014 earnings forecast, saying that raw milk prices were too unpredictable. Dairy herds have shrunk to their lowest levels in decades, but thanks to low corn prices, they are starting to build them up again. This might depress prices (which have been on the rise) further in the coming months.
Unfortunately, DF and other milk processors have been waging a losing battle to boost fluid milk consumption, which has been dropping for years — Dean Foods’ milk sales volumes dropped 4% in the latest quarter.
All hope isn’t lost, though. DF also makes dairy products such as ice cream and Land O’Lakes butter, which will be more profitable if a key cost such as corn is cheap.
Investors looking for a potential turnaround should consider this stock because dairy prices will swing up again. That’s the reason why Credit Suisse analyst Robert Moskow recently raised his rating on DF from “neutral” to “outperform.”
Domino’s (DPZ) and Papa John’s (PZZA)
Average 52-week price target: $81.50 (9 percent above current price), $53.50 (35 percent above current prices).
Connection to corn prices: Plentiful supplies of milk are pinching margins at Dean Foods, but they’ll be good news for companies like Domino’s (DPZ) and Papa John’s (PZZA), which are dependent on products such as scheese.
The USDA recently raised its milk production forecasts as lower feed costs are expected to support higher output per cow, and that should be a relief to DPZ and PZZA.
PZZA bemoaned rising cheese costs in its latest earnings report, with cheese jumping to $2.13 per pound from $1.78. which are expected to push down cheese prices starting next years. DPZ, though, seems to be doing well even with high cheese prices. Domino’s reported-better-than-expected results in its most recent quarter while PZZA disappointed. Should cheese prices fall, however, profits at both pizza-makers should improve.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. He can be reached on Twitter at @jdberr.