Agriculture may not be synonymous with innovation in today's economy, but consider this: The United States planted fewer acres of corn in 2017 than it did in 1927, but produced eight times as many bushels. Steadily climbing yield on American farms has been made possible through innovative tools spanning genetic engineering, pest management, and even machine learning climate prediction tools.
Contrary to popular belief, relatively little corn becomes human food directly. Instead, the incredible production gains in the last century were necessary to meet rising demands in animal feed and ethanol applications. Then again, when annual production is measured at nearly 13 billion bushels, it shouldn't be too surprising that the crop creates massive downstream markets for value-added products.
This should serve as a reminder not to overlook corn stocks. The leading companies in the space are large (a requirement to compete in any commodity market), boast sizable cash flows, and even have growth opportunities on the horizon. If you're interested in investing in one of America's top industries, then consider buying food ingredients leader Ingredion (INGR 0.48%), diversified ethanol manufacturer Green Plains (GPRE 1.91%), and Archer Daniels Midland (ADM 1.48%).
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Food ingredients for the win
Ingredion, formerly Corn Products, is a leading supplier of corn-based sweeteners and starches, also known as the 12% of American corn that goes directly to human food applications. It posted nearly identical annual revenue totals from 2014 to 2016, although slightly rising revenue in the second and third quarters of 2017 provides hope that the company can break that stagnant cycle.
Even if refenue doesn't rise in the near term, there's not much for investors to complain about. Ingredion has boosted earnings per share and cash flow in recent years as management successfully increased the share of specialty ingredients in the portfolio. From 2015 to 2016, adjusted EPS rose from $5.88 to $7.13 and totaled $5.72 in just the first nine months of 2017. Healthy and rising cash flow has allowed the company to pay down debt on an already clean balance sheet and boost its dividend 33% since mid-2016.
Ingredion has a long-term goal of generating 35% of its revenue from high-margin specialty ingredients, up from 28% today. Meanwhile, it's exploring opportunities to expand in higher-growth markets in South America and Asia, which could provide a significant boost considering 61% of sales are sourced from customers in North America. Long story short, the company may be trading at all-time highs, but food and beverage companies will always need sweeteners and starches. That makes this a top corn stock.
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Diversified ethanol leader
Green Plains chooses to upgrade the value of corn a bit differently than Ingredion, but that didn't work out in 2017. Well, I think Wall Street simply isn't giving the stock the credit it deserves, although that may end this year. The "problem" is that the company is North America's second-largest ethanol producer, so it gets treated like one. But that simplistic analysis fails to recognize the diversification efforts of the last two years.
Consider that Green Plains is now the world's leading manufacturer of vinegar (corn makes ethanol, ethanol makes vinegar) and can be found in household brands including Heinz Ketchup and Windex. It's also the nation's fourth-largest cattle feedlot operator (corn byproducts from ethanol manufacturing become animal feed) with a long-term offtake agreement with Cargill.
In fact, nonethanol businesses provided over half of the company's EBITDA in the first nine months of 2017. Those include the food ingredients segments comprised of the vinegar and meat businesses mentioned above and the profits provided by Green Plains' stake in a master limited partnership that handles all of its transportation and logistics needs.
It's been easy to punish ethanol producers lately, especially considering the unusual level of political uncertainty encountered in 2017 and weak margins from a glut of supply. Then again, that's the point of diversifying into higher-margin products, but Wall Street has yet to reward the company's successful de-risking efforts. That presents a big opportunity in my opinion: The corn stock is historically cheap and boasts a 2.8% dividend yield.
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Integrated agricultural company
Archer Daniels Midland offers an integrated stack of corn products spanning the entire value chain, from raw and processed agricultural products to specialty food ingredients. The company struggled a bit in 2017 in a tough global operating environment, but its corn processing segment was the only one of the five to post year-over-year gains in operating income through the first nine months.
The segment grinds 72 million bushels of corn per month and tracks the performance of corn processing, sweeteners and starches, and ethanol production. In fact, the company is the largest ethanol producer in the world with 1.7 billion gallons of annual capacity. That's not where its fermentation prowess ends, either. Archer Daniels Midland upgrades some of its corn into industry-leading fish feed for aquaculture applications with its industrial biotech infrastructure. Similar development-stage ingredients could reach the market in the coming years. It's also about to convert some of its fuel ethanol capacity into high-margin beverage alcohol production assets.
The good news is that a rough 2017 could have been much worse if not for the company's margin boosting activities in recent years. Better yet, the increased operational efficiency throughout the portfolio provides an advantageous position for when market conditions begin improving. Until then, investors in this corn stock can sit back and enjoy a business oozing with cash flow, the 3.1% dividend yield, and a relatively cheap market valuation.
What does it mean for investors?
Agriculture isn't the most exciting industry, but it's vital to any thriving economy. America's world-leading corn market is ripe with opportunities for investors who look in the right places. The key is to find businesses upgrading the value of corn ingredients that offer reasons to stick around for the long haul, be it value, growth, income, or any combination of the bunch. That's why I think Ingredion, Green Plains, and Archer Daniels Midland are top corn stocks to consider buying.
