Commodity Inflation Hitting Food Stocks

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.

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.

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.

The essential

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.