Does a Drop in Global Food Prices Mean it's Time to Buy?

According to the United Nations Food Agency, or FAO, in January, global food prices fell 1.3% from December. Why? The supply of oil, sugar, and cereals remains strong while demand is not responding as fast. Facts are facts: food prices have dropped 4.4% year-over-year after a 2013 that showed a continuous soft decline. Is this scenario beneficial for food stocks?

Let's check out The Hain Celestial Group (NASDAQ: HAIN  ) , United Natural Foods (NASDAQ: UNFI  ) , and ConAgra Foods (NYSE: CAG  )  and find out.

Growing in organic foods
Exhibiting a strong growth profile, The Hain Celestial Group is a leader in natural food and personal-care products.

Hain's net sales during the first quarter of fiscal 2014 reached $477.5 million, growing nearly 33% year-over-year. The key? Expanding global demand for organic products is helping Hain big time, as the company holds leadership in many organic products. As you know, organic products have better margins than regular foods. Plus, Hain's recent acquisitions, such as Tilda and Hartley's, are expanding its geographical presence. If demand continues to grow, this company will continue growing as well.

Focus on North America
The second company to keep an eye on is United Natural Foods, a leading distributor of organic, natural, and specialty foods as well as non-food products in North America.

The growing demand for products that promote a healthy lifestyle is also pushing sales up for United Natural Foods. The company is positioned as a leader in many categories as well, and it enjoys the benefits of this. In fact, United Natural Foods' sales grew 22.2% year-over-year in the fourth quarter of fiscal 2013. Plus, by acquiring Trudeau Foods, the company's distribution business will get a boost.

However, two things could affect United Natural Foods: its high exposure to North America, and especially its great dependence on Whole Foods Market (NASDAQ: WFM  ) , which accounts for more than 30% of its net sales.

All-American giant
Finally, there's ConAgra Foods, a company with a presence in 97% of American households.

ConAgra's second quarter of fiscal 2014 got a boost from the acquisition of Ralcorp. Revenue in the quarter climbed 9% year-over-year to $4.7 billion. Not a bad performance for this giant.

An important initiative to follow with ConAgra is its Ardent Mills venture, which consists of a merger of its flour-milling business with those of Cargill and CHS to form the largest flour miller in the U.S.  For now, the venture is delayed due to regulatory issues, but when it becomes effective it is expected to dilute ConAgra's earnings in the short term. Nonetheless, the venture should contribute to ConAgra in terms of efficiency, innovation capabilities expansion, and supply chain solutions.

Final thoughts
Overall, the food industry looks healthy and the drop in prices is not a huge issue for now. The fact is that although prices are dropping slightly they still remain at historical heights, so this scenario is still beneficial for food companies. If demand remains solid and food production does not increase significantly, it will be hard to see a strong drop in prices in the near-term. Hence, the outlook for food-related stocks is stable.

The change in consumer habits has put organic and natural foods at the center of the scene, and here Hain and United Natural Foods are main characters. However, the competition is getting tougher in this market and big players such as Nestle, Kraft Foods, and Groupe Danone want a bigger piece of the pie.

As mentioned above, Hain should maintain its momentum. United Natural Foods shares some common features with Hain, nonetheless, its strong regional exposure and top-client concentration are relevant weaknesses to be taken into consideration.

In the case of ConAgra Foods, the growing demand for organic products has not had a significant impact on its market share. The company still holds a strong presence and brand recognition that can withstand some more volatility in food prices. Watch how the business with Ardent Mills evolves.

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