What the Midwest Heat Means for Commodity Companies

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The continued heat wave in the Midwest has been brutal on residents, and now it's beginning to take its toll on the nation's crops. For companies such as agricultural industry leader Archer Daniels Midland (NYSE: ADM  ) , $9.4 billion Bunge Limited (NYSE: BG  ) , and Ingredion (NYSE: INGR  ) higher commodity prices will have a negative, near-term impact on earnings. Unfortunately for investors, pricing pressures could last through much of the year as the stifling heat continues.

Children of the corn
Corn is front and center in the discussion of Midwest heat and our nation's crops. You don't have to know how to whittle to recognize that corn is one of the country's leading agricultural commodities. What you may not know is this is a critical time for the year's corn crop; yup, it's pollination time. The 100-plus-degree temperatures have dropped the good-to-excellent rating of the nation's corn crop down 7% in the past week alone.

The result? December corn futures have shot up about 30% in the last couple of weeks on supply concerns. That kind of jump in prices is sure to affect overhead, and as the leader of the industry pack, Archer Daniels Midland is going to feel the sting. Last quarter alone, the corn processing unit of ADM generated $130 million in operating profit, down 36%.  For Bunge, higher corn prices will, just as they did last quarter, cut into profits at the company's ethanol plants. Though corn processing is now only 11% of its overall revenues, Ingredion is still widely viewed as a commodity-related investment, so the higher corn prices remain a cause for concern.

Though analyst ratings are hardly a reason to buy or sell, it does warrant mentioning that Citigroup recently downgraded Archer Daniels Midland stock as a direct result of Midwest growing conditions.

The problems go beyond corn
Adding insult to injury is the fate of soybean futures. According to the USDA Weekly Crop Progress and Condition report, soybeans have taken a beating for the fourth week in a row. And based on weather reports, it doesn't appear the negative trend will end anytime soon.

But what about the wheat? Supplies are solid, and the crop has withstood the sweltering heat better than corn or soybeans. So all should be right with the wheat world, right? Unfortunately, wheat tends to follow the lead of corn and soybeans in the commodities market, so you won't find much relief there.

So, what now?
As the commodity leaders, Archer Daniels Midland will take the brunt of the jump in commodity prices in the near future. Relatively smaller players like Bunge and Ingredion are likely to meander with little to no upside until the weather starts cooperating. Already a shareholder? All three are sound "holds"; they're reasonably valued, and each pays a decent dividend. ADM's 2.4% is among the highest in the industry, the 1.7% for Bunge Limited shareholders is also solid, and Ingredion brings up the rear with a 1.6% yield. Bottom line? The heat is a near-term situation, so keep 'em if you've got 'em, and hold off if you're not already an owner.

The crazy weather will certainly affect commodity prices and the companies that rely on them. For a few longer-term opportunities, check out the Fool's free special report "3 American Companies Set to Dominate the World."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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Related Tickers

10/21/2016 4:00 PM
ADM $42.32 Up +0.14 +0.33%
Archer Daniels Mid… CAPS Rating: ***
BG $60.85 Up +0.98 +1.64%
Bunge CAPS Rating: ***
INGR $130.41 Up +0.11 +0.08%
Ingredion CAPS Rating: *****