BOSTON ( TheStreet) -- Slim Jims, Spam and chicken burritos may not get any cheaper in the checkout aisle, but the companies that make them are about to reap big profits as the price of corn -- a main ingredient in the products and in feed -- falls.
Corn commodities were trading at record levels a few weeks ago amid reports of low supplies and an outlook for more of the same. That led to talk of a knock-on effect with higher prices for everything from soft drinks to steak, and thinner profits for food and beverage companies.
But that got turned around Friday, surprising commodities experts, when the U.S. Department of Agriculture reported higher inventories and much more corn being grown in the heartland than had been expected. What's more, the government gave a more optimistic outlook on the pricing of feed grains.
"It was unusual, truly a surprise to people," said Sal Gilbertie, chief investment officer of the
Teucrium Corn Fund (
CORN).
And that sets up some big profit opportunities at companies because lower corn prices will result in wider profit margins. And we're not talking chicken feed. As a direct result of the government's report,
Goldman Sachs analysts slashed their forecast for corn and wheat prices by 26%.
"Anybody that uses corn is going to have some benefit as the price of their raw materials has declined significantly," said Gilbertie, whose exchange traded fund invests only in corn commodities products. Industries using corn feed as a food stock to raise animals "will have some significant and immediate benefits" since their highest cost is the price of corn.
That could mean everything from cereal makers to meatpackers.
Meatpackers, in particular, aren't squealing about the news. In a report on a big meatpacker that predates the USDA's announcement,
Morningstar analyst Jeremy Cohen wrote that "the rapid increase in ethanol production caused grain prices to spike to levels well above normal, and with animal feed constituting 60% to 65% of the total cost of raising hogs and corn constituting roughly 85% of a pig's diet, elevated corn prices" weigh heavily on meat producers' profits.
From an investment perspective, the best bets are probably on the shares of companies that had already been raising their prices to customers in anticipation of what they thought would be much higher corn costs later this year.
Farm-products stocks as a group rose 5% in the week ending July 1, as tracked by Morningstar, turning around what had been, until then, a losing year. They are up 4.8% on the year as of last Friday. The
S&P 500 Index was up 5.7% in the same week and is up 7.6% this year.
Corn prices may get another break if Congress decides that it will end its ethanol production tax subsidy program that takes millions of acres of corn production away from food products solely for the production of ethanol as a fuel additive. But, for now, it appears that's a whole 'nother can of corn.
Here are
seven companies that should reap increasing profits this year directly as a result of the government's more optimistic prediction of a bumper crop in corn this year:
