InvestWrite Champ: Corn Impacts Monsanto and Kellogg

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InvestWrite, Fall 2007-Spring 2008: Grand Championship Essay, Middle School

Student Instructions: Show how the "news" affects stock prices. Choose two companies that are in different industries. Discuss an external event that would affect the price of the stock in both companies. Explain how share prices will either go up or down in each of these companies due to the event. How do you use your research to make a choice about which stock you would like to invest in?

"How Supply and Demand Affects Stocks" by Hayden Lineberger

6th Grade

Forsyth Country Day School

Lewisville, North Carolina

The economy is weak Two stocks I seek I need some advice On what will affect the price -- Hayden Lineberger

There are many internal and external events that affect stock prices. Often the media can have a strong influence on our investment decisions. Before investing, it is important to do thorough research so investors are informed and not swayed by the news. Recently the headlines shouted, "Cut in corn acreage to push prices higher." This news influences stock prices. Two companies affected by the external factor, supply and demand of corn, are Monsanto (MON Quote) and Kellogg (K Quote).

Monsanto is an $8.6 billion agricultural company that produces leading seed brands in crops such as corn, cotton, and soybeans. Kellogg, the leading producer of cereal and convenience foods, has sales of $11.8 billon. The most important external event that affects the price of these two stocks is the supply and demand of corn. Corn demand is rising while the supply has dropped, pushing the price per bushel from $3 to $5. As noted by the Associated Press (April 1, 2008), farmers are cutting back on the amount of corn they will be planting and this news sent prices higher. The decline in supply is caused by the expense of growing corn and the switch to more affordable soybean crops. Demand and prices are increasing due to growing need to feed people and livestock, plus a weak dollar encourages exports. In addition, the oil industry needs corn to produce ethanol, an alternative fuel source. With the corn shortage, consumers will see higher prices as corn is used for animal feed, soft drinks, breads, diapers, and even dry-cell batteries.

The shortage and higher price of corn could have a negative affect on Kellogg stock. Since corn is used in the majority of products that the company makes, their manufacturing costs will rise resulting in higher consumer prices and possibly lower sales. Additionally, recent news of a predicted recession causes people to reduce purchases. The opposite affect will happen to Monsanto's stock. The increased demand and price for corn will cause Monsanto's stock to soar. The revenues from corn sales are projected to increase resulting in more profitability. Additionally, even if farmers shift to soybeans, Monsanto's sales will be protected, because of holding the largest market share of soybeans.

To avoid letting the "news" of increased corn prices direct an investment decision, research should be undertaken about the economy, industry trends, and company financials. An informed decision about stock investments should involve several research tools. Newspaper articles, Internet sites (Reuters and Bloomberg), annual reports, and analysts' forecasts are helpful in choosing a stock. Financials, such as quarterly growth trends, are insightful when making investments. The P/E ratio is also something to consider when trying to pick a good stock. You want a ratio in the mid-teens, which provides moderate growth; not too fast and not to slow.

The annual reports of Monsanto and Kellogg showed information about their products and future plans for growth. For many reasons, especially rising corn prices, Kellogg is a risky stock investment. While Kellogg has the second highest share of the cereal market, this share has declined and their financial performance is more unstable than Monsanto's. Additionally, the company is not diversified beyond the food sector. While Kellogg will be hurt by the shortage of corn, Monsanto will benefit, and their stock is a good investment. Monsanto will receive more money for the corn seed they sell, and that will drive their sales, profits, and stock price higher. Their growth plans include a focus on corn and soybeans and the prices of these have soared due to strong global food demand and the ethanol industry. Since they are a diversified company with soybeans and insecticides, Monsanto is insulated if the price or demand for corn drops drastically.

The "news" coupled with supply and demand, are two external factors that can have a strong affect on the price of stocks. It is important to use other research tools before making an investment decision. Alan Greenspan [former Fed chairman] said, "We are passing the financial baton to a society not ready to use it." It is in our best interest to be well informed before buying stocks.

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