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How Food Giants are Benefiting From a Record Corn Harvest

A bin-busting harvest that has lowered grain prices is presenting lucrative opportunities for companies that process corn and soybeans. Lower input costs will lead to higher profits for food giants like Archer Daniels Midland  (NYSE: ADM  ) . With the company's shares already up 52% year to date, let's examine whether a strong grain harvest will help propel stocks like Archer Daniels Midland even higher.

Record corn crop
The U.S. Department of Agriculture said corn production is forecast at a record 14 billion bushels, up 30% from 2012's drought-stricken harvest. Soybean production is forecast at 3.26 billion bushels, up 7% from last year.

Corn prices have fallen from $6.50 per bushel a year ago to around $4.20 today. Soybean prices are down from over $17 per bushel a year ago to $13 per bushel today.

Limited opportunities for investors
The largest U.S. grain storage companies -- Cargill, Archer Daniels Midland, ConAgra (NYSE: CAG)Bunge Corp (NYSE: BG), and ContiGroup Companies -- will all benefit from a strong U.S. harvest.  Falling grain prices and higher volumes of grain will decrease processing costs and lead to higher margins in their oilseeds and corn processing divisions. They process corn into alcohol, sweeteners, starches and ethanol.

Investing in grain-handling companies is challenging because two of the best companies, Cargill and ContiGroup Companies, are well-established privately held companies that we retail investors can't own.

However, Archer Daniels Midland is also among the best of breed in this business, with money-making operations in oilseeds and corn processing and agricultural services. Let's see how well it stacks up to Bunge and ConAgra.

These multinational grain companies usually buy companies to grow revenues. But sometimes their acquisitions don't work out. To determine whether these companies are good managers of capital, look at return on invested capital (ROIC), which divides a company's earnings by its total capital. Here are ROIC numbers for three companies in the grain business, plus other key metrics for valuation:
Name 2014 P/E Debt/Capital Net Profit Margin Price/sales Yield Return on Invested Capital 2013
ADM 12.85 0.26 1.64 0.30 1.84 3.82
Bunge 10.54 0.50 -0.50 0.19 1.49 -3.70
ConAgra 12.67 0.64 3.94 0.84 3.07 3.94

Source: Yahoo Finance, Morningstar and Charles Schwab.

Looking at price/earnings ratio and price/sales, Bunge looks cheap compared to its peers, but Bunge's return on invested capital and net profit margin were both negative. The company invested a lot of money acquiring assets in recent years. It's time for Bunge management to squeeze higher profits from all those acquisitions.

Bunge stock is up 11% year to date, but it is 20% below the highs it reached prior to the 2008 financial crisis. This stock's performance depends on whether management can execute on improving ROIC and making the most of the 2013 U.S. harvest.

ADM stock is trading at 12.85-times 2014 forecast, below its historical range of 13-22 P/E, yet earnings are growing substantially. Earnings in the most recent quarter climbed 260% to $0.72 per share, from $0.28 in the year-ago period.

ConAgra's lost potato
ConAgra will benefit from the lower grain prices and increased volumes of grain, but the company has other challenges. In the latest quarter, the company's Lamb Weston potato products' sales and profits were below year-ago amounts, because a major foodservice customer did not renew a sizable amount of potato business, the company said.

ConAgra's fiscal first quarter earnings per share were $0.34, down 46% from $0.61 in the year-ago period. ConAgra has the best dividend yield of 3.07%, but has higher debt/capital ratio and much higher valuation in price/sales. ADM and Bunge are much cheaper based on price/sales. ConAgra stock is up 10% year to date but is down 13% from its high reached in August.

Lower prices for corn and beans may not trickle down to retail customers at the grocery store, but they will encourage cattlemen to rebuild their herds, leading to increased demand for feed grains sold by companies like Archer Daniels Midland.

Over the long term, Archer Daniels Midland should benefit from growing demand for grains and agricultural products due to worldwide population growth. ADM's net income was up 2.6 times in the third quarter. I expect the company to have an outstanding fourth quarter handling grain from the great harvest, and ADM's return on invested capital should improve in 2014. All in all, this stock looks more attractive than its peers.

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9/28/2016 4:01 PM
ADM $41.85 Down -0.04 -0.10%
Archer Daniels Mid… CAPS Rating: ****
BG $59.48 Up +0.17 +0.29%
Bunge CAPS Rating: ***
CAG $43.13 Down -0.11 -0.25%
ConAgra Foods CAPS Rating: ****