Sanderson Farms (SAFM): Set up to Move
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An Entry From The Discplined Investor
There is a good deal of quacking about looking and walking like ducks these days. So why not cluck instead, if only for some relief.
During the past several week, I have been looking closely at opportunities within this decrepit excuse for a stock market. That has lead towards a simple thesis: There is clearly a shift in mentality towards commodities and pressure is building towards another bubbling. That lead to the next obvious question: How to profit?
One particular food commodity has seen a significant move recently: CORN. The same corn that is used for production of ethanol and the same corn that is used to feed chickens. There is a clear inverse relationship that has emerged between corn pricing and the share prices of some of the poultry producers. Sanderson Farms (Nasdaq: SAFM) is the one from this sector that seems to have an opportunity to move higher, once the realization that corn prices have a built-in ceiling. That ceiling is created by the need for corn prices to stay within reasonable limits in order to appease the ethanol producers and to maintain reasonable poultry prices.
SAFM Price to Corn Prices
Sure, I know what you are thinking….Our government and the oil giants (one and the same actually) could give a damn and don’t care if ethanol is priced out of the market. But, in truth, they want to keep the appearance of an alternative fuel for the future, just as much as many of us wish to have an alternative. Beyond the basic premise that corn prices affect the share price of SAFM, there is the fact that SAFM is showing a substantial increase in production and have returned from almost complete devastation after Hurricane Katrina. The plants are producing and demand is high on a global scale. Additionally, there is talk of a North Carolina plant that could increase production capacity.
Even if there is significant “food” inflation, the recent increase in corn prices is not sustainable. Cristoph Berg, a managing director at the German-based commodities research firm F.O. Licht., has stated that, “If corn prices are beyond a certain threshold, many [ethanol] plants will just stop producing.” That will cause a drop in demand for corn which would send prices down. As the above chart shows, there is a very close relationship to the price of SAFM shares and corn prices.
On the other hand, there is talk about a “dry” year and reduced corn fields that could have corn prices staying at these high levels and potentially increasing. That would create problems and it would appear that a pass through of some of the costs would mute sales. Even so, exports will continue to flourish as the dollar is weak and the world is hungry.
The price points? Fundamentally, the company is sound. Market psychology is a much different story. Even so, buy below $37, protect with a stop near $31 and look for $45 if the markets show any signs of upward movement.
The Discplined Investor
[JT]
Sign up at EasyStockAlerts for free to see your stock news before it breaks to the rest of the public!
There is a good deal of quacking about looking and walking like ducks these days. So why not cluck instead, if only for some relief.
During the past several week, I have been looking closely at opportunities within this decrepit excuse for a stock market. That has lead towards a simple thesis: There is clearly a shift in mentality towards commodities and pressure is building towards another bubbling. That lead to the next obvious question: How to profit?
One particular food commodity has seen a significant move recently: CORN. The same corn that is used for production of ethanol and the same corn that is used to feed chickens. There is a clear inverse relationship that has emerged between corn pricing and the share prices of some of the poultry producers. Sanderson Farms (Nasdaq: SAFM) is the one from this sector that seems to have an opportunity to move higher, once the realization that corn prices have a built-in ceiling. That ceiling is created by the need for corn prices to stay within reasonable limits in order to appease the ethanol producers and to maintain reasonable poultry prices.
SAFM Price to Corn Prices
Sure, I know what you are thinking….Our government and the oil giants (one and the same actually) could give a damn and don’t care if ethanol is priced out of the market. But, in truth, they want to keep the appearance of an alternative fuel for the future, just as much as many of us wish to have an alternative. Beyond the basic premise that corn prices affect the share price of SAFM, there is the fact that SAFM is showing a substantial increase in production and have returned from almost complete devastation after Hurricane Katrina. The plants are producing and demand is high on a global scale. Additionally, there is talk of a North Carolina plant that could increase production capacity.
Even if there is significant “food” inflation, the recent increase in corn prices is not sustainable. Cristoph Berg, a managing director at the German-based commodities research firm F.O. Licht., has stated that, “If corn prices are beyond a certain threshold, many [ethanol] plants will just stop producing.” That will cause a drop in demand for corn which would send prices down. As the above chart shows, there is a very close relationship to the price of SAFM shares and corn prices.
On the other hand, there is talk about a “dry” year and reduced corn fields that could have corn prices staying at these high levels and potentially increasing. That would create problems and it would appear that a pass through of some of the costs would mute sales. Even so, exports will continue to flourish as the dollar is weak and the world is hungry.
The price points? Fundamentally, the company is sound. Market psychology is a much different story. Even so, buy below $37, protect with a stop near $31 and look for $45 if the markets show any signs of upward movement.
The Discplined Investor
[JT]
Sign up at EasyStockAlerts for free to see your stock news before it breaks to the rest of the public!
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