Food stocks have underperformed so far this year, held back by escalating commodity inflation that will squeeze margins for these slow-moving giants. The Invesco DB Agriculture (DBA) ETF hit a 52-week high this week, with wheat trading at a six-year high and corn at a seven-year high, highlighting challenges for big players that include Kellogg Company (K) and Campbell Soup Company (CPB). Even the sector’s top performers in 2020 are feeling the heat, with General Mills, Inc. (GIS) and Hormel Foods Corporation (HRL) rapidly descending from multi-year highs.
Key points to remember
- Wheat and corn futures are trading at multi-year highs.
- Rising commodity inflation triggered a massive sell-off in food stocks.
- It is more difficult for these companies to find investors in times of rising interest rates.
- Kellogg shares could trade in the lower $50 before attracting committed buying interest.
Companies are hit with a one-two-three punch because they are also defensive players that pay high dividend yields. This kept them afloat during periods of risk aversion and low interest rates, but the yield curve is now steepening as the CBOE 10-Year Treasury Yield Index (TNX) has hit a high of 10 months. This makes high stock returns less attractive, as investors can seek better returns through faster-moving stocks and bond markets.
Passive management also contributed to the underperformance, as evidenced by Kellogg, owner of MorningStar Farms. The processor had a golden opportunity to capitalize on the huge interest in plant-based meats, but did nothing until waves of competitors hit the market. Still, he’s trying to catch up by teaming up with Dunkin’ to launch a new plant-based menu option. Unfortunately, the company has already lost huge revenue to Beyond Meat, Inc. (BYND) and privately owned Impossible Burger.
Agriculture ETF Monthly Chart (2008 – 2021)
The majority of commodity-dependent food stocks are expected to trade inversely to the agricultural fund in the coming months. This instrument reached an all-time high in the $40 range in 2008 and lost two-thirds of its value during the economic collapse. It settled into the lower $20s and rose in the new decade, posting a lower high in 2011. The bears then regained control, completing a double split in 2016 that resulted in a strong downtrend. decline over several years.
The fund hit an all-time low of $13.15 during the 2020 pandemic decline and rose in July. It broke above four-year trendline resistance in November, paving the way for further gains that are expected to fade around the 50-month exponential moving average (EMA), which acted as resistance. for almost 10 years. A pullback from this level could provide a low-risk buying opportunity or an ideal time to unload long-term exposure.
Inflation is the decline in purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase in the average price level of a basket of selected goods and services in an economy over a certain period of time. The rise in the general price level, often expressed as a percentage, means that a currency unit is actually buying less than in previous periods.
Kellogg Monthly Chart (2000 – 2021)
The stock currently pays a forward dividend yield of 3.86%. It bottomed at $20.75 in 2000, marking the first point in a shallow rising trend line that has now persisted for more than two decades. A multi-year uptrend reached an all-time high at $87.16 in 2016, giving way to a sharp decline that found support at the trendline in the second quarter of 2019. It posted a 52-week high at the end of 2019 and rebounded, bouncing off the trendline again.
The bullish action hit the $70 low in mid-2020, but a breakout attempt failed in July, producing a steady decline that just pierced the $60 level for the first time since March 2020. he stock is now trading about five points above the $54 trendline, at the same time as the monthly stochastic oscillator has moved into the oversold zone. As a result, selling pressure is expected to increase in the coming weeks, bringing the trendline into play for the sixth time since 2000.
Trend lines are easily recognizable lines that traders draw on charts to connect a series of prices together or show the best fit of certain data. The resulting line is then used to give the trader a good idea of the direction in which the value of an investment might move.
Rising commodity inflation has put a ceiling on food stocks, increasing the odds of a year of lagging performance.
Disclosure: The author held Kellogg and Campbell Soup in a family account at the time of publication, but no positions in the other aforementioned titles.