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Tickers in this Article: MCD, KFT, K, CAG, HSY
It's hard to believe, but it was only six month's ago that food inflation was 'the' hot button for investors - and not a bullish one. Though it wasn't the only crop demanding higher prices, rising corn costs were the ringleader of the mania. The price of a bushel of corn soared from around $400 in July of last year to $700 early in 2011 - a hefty 75% increase. Many so-called industry experts predicted dire results for food companies too, assuming profits would be pinched between cash-strapped consumers and higher input costs.

It's amazing how wrong, or how poorly-timed, some expert opinions can be. This is one of those times. (To learn more about inflation, see What You Should Know About Inflation.)

TUTORIAL: All About Inflation

What We Were Hearing at the Time
The ringing alarm bells of soaring commodity prices drew plenty of bears out of the woodwork, by the time the shellshock of rampant food inflation wore off. To be fair, the opinions at the time may have been based on the early outcomes of food inflation. Both ConAgra (NYSE:CAG) and Kellogg Co. (NYSE:K) had both posted problematic earnings shortly after food prices started to rise in mid-2010. And other corporations warned of the same, including the likes of Hershey (NYSE:HSY), Kraft Foods (NYS:KFT) and McDonald's (NYSE:MCD). None of these outfits were optimistic about the effects rising food costs would have on margins.

In retrospect, the numbers say the worry was overblown.

In the Meantime
The bulk of any rising input costs are usually passed along to the consumer. What was different this time was a fairly widespread belief that consumers simply didn't have the fiscal wherewithal to pay up, and simply wouldn't absorb any price increases. But they did. Between May, 2010 and May, 2011, grocery prices successfully rose 4.4% (as if consumers had any real choice but to pay it, other than to not eat).

The litmus test, however, is earnings. Did these companies actually see their margins destroyed, as the pros and some of the corporations feared? The numbers don't lie. For the quarter ending on April 22, Kellogg's net profit margin was 10.5%, which basically tied for the best profit margin in the last four quarters, but that $366 million in profit was actually the biggest bottom line of the last four.

Same story for ConAgra, which had suffered a couple of quarters earlier when food inflation struck without warning. The most recent quarter's $214.8 million in profit on $3.1 billion in revenue translates into a profit margin of 6.8%, which was the strongest margin of the last four quarters. In fact, the cost of revenue went down slightly in Q1 2011 (from Q4 2010), on a basically flat top line.

Kraft and Hershey didn't show any real margin problems last quarter, either. In fact, even on a per-share basis, it was the best Q1 (or calendar equivalent) that Hershey, ConAgra and Kraft had seen in years. McDonald's is the only one of the five in question here that struggled on the margins from in the previous quarter, yet even that was a minor blip.

So much for the theory that these companies were headed for trouble.

The Bottom Line
While the data simply illustrates that these organizations were able to pass along higher input costs to the ultimate buyers, that's almost a secondary point. The real take-away here is that the obvious logic isn't always accurate, nor are expert forecasts always on target. Most of the outlooks also assumed the food price trends would persist, which of course they didn't. That's not to say it's easy to predict anything, but by the time the early-2011 warnings were rolled out to investors, these companies were more than prepared to deal with inflation that had already been in place for months.

In the meantime, it's worth noting that while most food and crop (input) prices have fallen back from their peaks a few weeks ago, grocery prices haven't. That sets up a good chance of relatively huge margins in the food sector for Q2's and Q3's earnings.

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