First it was the carry trade, then it was the inflation trade (even if the two were cut from the same cloth); more recently, emerging markets like Brazil have captured investors' hearts and minds. (For background reading, see Investing Seasonally In The Corn Market.)
So what's the next big trend that's going to fan the media's flames. We're placing bets on corn.
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However, unlike the inflation trade and the gold craze, the corn trade is more than just hot - it's fundamentally sound. Here's why it should work well in 2011, and how you can play it.
Rising Commodity Prices Are Bad for Food Stocks, Unless They're Not
Rising food prices - thanks to soaring prices of commodities like wheat, corn and other basic food stocks - have put food and agriculture companies back in the spotlight. And if you're analyst Alexia Howard of Sanford C. Bernstein, that's not a good thing. In a January report, Howard said, "History shows us that food stocks tend to underperform the market as commodity costs rise, since gross margins are crushed."
There's one small problem with this assumption though: It just isn't true.
Indeed, if recent history is any indication, rising commodity prices not only allow food companies to crank up prices, but they also allow them sneak in a little extra padding on their margins.
The numbers verify this too. When wheat prices soared to multiyear highs near $12.80 per bushel in February of 2008, Bunge (NYSE:BG), a major international agriculture and food company, turned in a stunning EPS of $4.73 in the second quarter of that year. That was a record breaker for the company, and it led to the most profitable year Bunge has seen since.
Similarly, when corn soared to $750 in June of 2008, that translated into a record-breaking quarter for the Kellogg Company (NYSE:K), which brought in a record (at the time) 89 cents per share in the third quarter of that year.
The same story goes for Archer Daniels Midland (NYSE:ADM), which saw a huge swell in income in the quarter reported for the period ending after corn, wheat and most other commodities shot higher in 2008.
Yes, they may groan and warn about it, but higher input prices have generally proved to be beneficial to food growers, processors and producers. (Discover some of the biggest companies that stand to benefit from rising costs in America's Biggest Food Companies.)
How to Cash in on Corn
While no two inflation scenarios are ever really the same, this current food inflation wave isn't expected to subside anytime soon. Where the 2008 rally did indeed end up just being a flash spike, analysts are predicting that this broad trend could persist for years. As a result, corn may provide investors with some long-term mileage.
Investors looking for a reasonable way to tap into this may do just fine with any of the three names we covered above, each of which has done pretty well when commodities rise - at least for a while. If you're looking for something a little less predictable, there are also a couple of obscure opportunities.
Outside-the-Box Corn Plays
One stock to consider is Sygenta (NYSE:SYT), an agribusiness company focused on enhancing crop yield and food quality. It's actually a crop-protection play as much as anything else, although it has a huge seed business too. Best of all, it has a lot of international exposure, which can help to smooth the effects of currency fluctuation.
Another novel name to ride this tide is Ralcorp Holdings (NYSE:RAH). It's also not a household name, but it is best known as the manufacturer and distributor of cereals that carry the Post brand name.
Being behind the scenes for Post and so many other smaller labels has been good for Ralcorp. We've seen five earnings beats in the last seven quarters. Plus, given the current situation, the company's forward-looking P/E of 11.7 may not do it justice.
The Bottom Line
Whether you're looking for a safe and reliable investment or something a little off the beaten path, the underlying trend in corn isn't apt to go away anytime soon. As such, it may be a good time to step into longer term agri-business holdings. (These funds make investing in gold, oil or grain an easier prospect. Check out Commodity Funds 101.)
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