Ms. Geissler: I cover both agribusiness and packaged foods. They all have different dynamics. On the packaged food side, the stocks that I tend to prefer are ones where there is more exposure to emerging markets simply because the U.S. has been very weak in 2009 and early 2010. And also I think that the companies that want to hit that long-term EPS growth target of 9% to 10% really will have to have more international exposure, particularly in developing markets, because growth in the U.S. market is significantly slower, and it will be hard to achieve that target without acquisitions. So the companies in the space that I have buy recommendations on are Heinz and Kraft, both of which have more exposure to emerging markets.
The agribusiness space can be roughly divided into the grain processors, ADM and Bunge, and the protein processors. I have Hormel, Smithfield and Tyson under coverage on that side. And then FDP, which doesn't really fit in either of those spaces but falls within the greater category of agribusiness because they actually own land; they are vertically integrated, and they're growing a big chunk of their banana and their pineapple business.
I would say the grain processors have had pretty good margins, particularly on the oilseed processing side in North America. That is shifting now that the South American crop is coming on line and we have a very big, robust South American soybean crop this spring. So we've seen some volume shift from North America to South America, and that has impacted utilization rates, etc. So going forward, we probably won't see as robust operating margins coming from that business line, but still very good. We normally see a seasonal downtick anyway this time of the year.
And I would say between the two I cover, ADM has exposure on the corn processing side that Bunge doesn't. So to the extent that there are dynamics going on in either the high-fructose corn syrup market or the ethanol market, they will be impacted by those dynamics. Ethanol has been pretty tough because there has been increased supply coming on line over the last six to 12 months, which has disrupted the supply/demand dynamics within that subsector, and so pricing has weakened. So even though corn prices are down, margins have contracted and I would expect that to continue for two or three quarters, until the EPA makes its ruling on the blend rate - whether it's going to be E12 or E15 - and we start seeing a pickup in demand on the ethanol side. Because right now we've kind of hit the blend wall, and we are not getting a lot of discretionary blending above the 10% level.
And then within protein, the dynamics have been very positive. In 2008 and 2009, the industry struggled. We had oversupply; corn prices and soybean prices were very high, so feed costs were pretty tough on margins, and we just had too much supply. And then we entered a recession, which meant there was a shift from away-from-home dining to at-home dining. Most restaurant meals have protein as a center, so you saw some volume shift from away-from-home to at-home consumption. And with the overall oversupply, pricing weakened. Now we've moved all that supply; 2009 was really about getting the inventory cleaned up, cutting production, and I think this is probably the first time I've ever seen where we've had all four proteins having a supply contraction. Beef, pork, chicken and turkey - all supplies are very tight, so you should get pretty good pricing across the space. And the big beneficiaries of that, I think, will be Hormel, in its turkey division, and Tyson, in its chicken division.
Tickers included in this excerpt: ADM, BG, CDSCY, CPB, FDP, HNZ, HRL, KFT, KO, PEP, SFD, TSN
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