Thursday, September 30, 2010

We're Swimming in Corn*, so Why Is Archer Daniels Midland's Stock Down? (ADM)

Ya got me. ADM makes stuff out of corn.
Quick and dirty, their products are food, feed and fuels.
And biopolymers. And de-icers. And superabsorbants used in adult incontinence products.
All made from corn.
Having a major feedstock trade lower will help the company. The question is when.
The stock is down 1.69% at $32.02.

From Bloomberg:
Corn Futures Drop Most in Eight Months as U.S. Boosts Inventory Estimate
Corn prices fell the most in more than eight months after the U.S., the biggest grower and exporter, said inventories before the harvest rose to the highest level since 2006.

Stockpiles on Sept. 1 totaled 1.708 billion bushels, up 2 percent from a year earlier, the U.S. Department of Agriculture said today in a report. Analysts in a Bloomberg News survey expected 1.407 billion, on average. Corn usage in the three months ended Aug. 31 was 2.6 billion bushels, up from 2.59 billion a year earlier.
The inventory number “is a negative surprise, and the market is adjusting to more of a supply cushion,” said Dale Durchholz, the senior market analyst for Agrivisor LLC in Bloomington, Illinois. “It’s like adding 2 million acres to this year’s harvest.”

Corn futures for December delivery fell 23.5 cents, or 4.7 percent, to $4.815 a bushel at 10 a.m. on the Chicago Board of Trade. A close at that price would be the biggest drop since Jan. 12. Earlier, the grain touched $4.7825, the lowest level since Sept. 13....MORE
From Barron's:
ADM Has Upside Grains 
AS WORLD POPULATIONS GROW, they will require more food and fuel. With its portfolio of food ingredients, livestock feed and biofuels, Archer Daniels Midland may well be the company supplying them.
Shares of the grain-processing powerhouse have already gained ground this year as shortages caused by bad weather in Europe and Canada pushed up prices for corn and wheat. But analysts say ADM (ticker: ADM) still has plenty of growing to do before harvest time, which also reflects its modest current valuation.

The stock trades at only 10.6 times forward earnings, below the 11.4 times for competitor Bunge (BG). Analysts argue ADM should fetch a premium to Bunge, based on its stronger average return on assets over the past three years.
ADM's grain storage and export businesses should continue to benefit from elevated grain prices. Two pending decisions by regulators on approving higher ethanol blends for cars could be additional catalysts over the next few months.
ADM recently finished a spate of capital projects related to its ethanol and bioplastics businesses, leaving more cash available to buy back shares. The shares also carry a 1.8% dividend yield, rounding out the solid picture.

To be sure, higher corn prices are a negative for ADM's high-fructose-corn-syrup business, which has already been battered by the perception of the sweetener as unhealthy. The volatility of commodity prices and ADM's complex hedging also make projecting the company's quarterly earnings particularly difficult, leaving room for misses. But analysts contend corn syrup isn't going away, and fans of ADM say it is best evaluated on a longer time line.

"We think that this is a tremendous long-term holding," says D. Tysen Nutt Jr., a senior portfolio manager at Delaware Investments, which owns ADM shares. "It's a great company at a reasonable valuation that is going to be part of this movement toward greater demand for food as economies and populations grow."

Nutt and his team at Delaware are more bullish on commodities than they are on stocks and see ADM as a way to play that. They estimate the shares could have something on the order of 50% price appreciation over the next three to five years.

Weather, as it often does, has played havoc with commodity prices. A drought in Russia, a key European supplier, and wet weather in Canada pushed wheat prices up more than 45% since the end of June. Corn prices rose more than 35% over that period on speculation that hot, dry weather damaged crops. Prices for both grains have eased recently, but Credit Suisse analyst Robert Moskow says there could be more upside for ADM if the arbitrage opportunities for the grain shortage in Europe play out....MORE
And you can't really swim in corn.
If you fall into a grain bin it is a virtual certainty that you will die unless you get help fast.