Food Deflation Could Drive EPS Growth For Labeled Food Producers
Grain prices are set to drop after historically high yields, giving big food producers a chance to expand their margins and bolster their brand. But since those same companies are currently facing low volumes from the 2012 drought, and most analysts haven’t priced in the effects of food deflation, now is a good time to buy, explains Citi analyst David Driscoll.
“The U.S. harvest will produce a record for field crop production, which has resulted in grain inventory replenishment and declining future agricultural prices,” Driscoll writes. “We expect grain and oilseed deflation of 20 percent in 2014, which is expected to drive higher margins and volumes for food manufacturers.”
Deflating food prices can increase profits
The idea that deflating food prices can increase profits seems counterintuitive, but for companies like Hershey Co (NYSE:HSY)’s and Kellogg Company (NYSE:K) food, deflation lowers their costs without seriously affecting the price of their own goods. In general, the more heavily branded a product category is, the more prices will remain steady despite food deflation, leading to higher margins. Understanding this dynamic, large food companies will even overestimate inflation in their forward guidance as a way of keeping prices high....MORE
And a repost from May of last year:
From Chart Porn: This has been making the rounds lately. I find it as interesting to look at the minimalist design inherent in modern logos as the ownership concentrations.
(click to enlarge)
