Tuesday, February 15, 2011

Kellogg (NYSE:K), General Mills (NYSE:GIS), Sara Lee (NYSE:SLE), Pepsico (NYSE:PEP) Good Investments

The branded food industry, represented by companies like Kellogg's (NYSE:K), General Mills (NYSE:GIS), Sara Lee (NYSE:SLE) and Pepsico (NYSE:PEP), are going to struggle for some time, as rising food prices will pressure margins, and even some boosts in food prices will be risky in light of people having the option of returning to generic food labels.

Increasing food demand and some weather conditions have resulted in the price of food skyrocketing, and as far as food demand goes, that isn't going to go away for a long time to come.

So where does that leave the branded food companies? In a very weak place. There's little they can do to combat the situation, and only raising prices can help them in their fight against shrinking margins and earnings, which is a limited option at best, and one they can only take so far.

Far better agricultural or food plays would be futures for some, and in those providing fertilizer and machinery to farmers. Food companies are going to be under immense pressure, and there is no doubt over the long term their business models will be questioned.

Other food areas that need to be watched closely are meat providers and restaurants, which will struggle in a very similar way as food companies, although restaurants may have some more options because not all food will rise, and they could spread price increases across the overall meal with not as much negative feedback.

Grocery store prices are watched on an individual item basis when prices are up, and shoppers quickly respond by going to a different item or category, such as generic mentioned above.

John Deere (NYSE:DE), Potash Corp. (NYSE:POT), Monsanto (NYSE:MON) Mosaic (NYSE:MOS) and Agrium (NYSE:AGU) are all solid plays whose products will be required to serve the growing demand for food, no matter what the end-product prices will be at the store.

Companies like these can pass input prices onto farmers, farmers onto processors and processors onto food companies. At that point, the limitations of the market come in, and there is less that can be done at that level than those before it.

That's not to say there aren't pressures below that level, as Monsanto found out with farmers who gravitated toward seeds from DuPont (NYSE:DD) when they felt the seed prices of Monsanto were too high. That was even with Monsanto having a superior seed, as far as measured by the number of traits.

All of that is part of the dynamic, but in the end, food companies are handed the least flexible situation, and will have the bulk of the challenge in how to overcome shrinking margins.

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