While Wells Fargo (WFC) is known for its banking operations, it’s also known for economic analysis. Those hoping for good news to appear on the grocery store front will be sadly disappointed.
The word out of Wells Fargo suggests that grocery store prices are likely to continue at their elevated levels for some time to come. This is backed up by a growing string of bad news out of the world’s farms.
I’m neutral on Wells Fargo, but if its suggestions about world food prices hold true, it suggests a course of action all its own.
Wells Fargo has had a comparatively mild year in share prices. A recent run-up allowed it to challenge $60 per share on two occasions, but lately it’s declined again, retreating to around $51. Seeing as it spent much of 2021 into 2022 around the $40 – $50 range, this is much more a reversion to type.
The latest news out of Wells Fargo is a disaster for anyone who shops for groceries. A recent interview with Michael Swanson, Wells Fargo’s Chief Agricultural Economist, and Lon Swanson, its Agricultural Consultant, spells bad news to come thanks to a range of reports about the latest winter wheat crop. Most of these reports proved worse than expected.
Wall Street’s Take
Turning to Wall Street, Wells Fargo has a Strong Buy consensus rating. That’s based on 12 Buys and four Holds assigned in the past three months. The average Wells Fargo price target of $61.84 implies 20.3% upside potential.
Analyst price targets range from a low of $54 per share to a high of $69 per share.
Hedge Funds, Dividends Paint a Mixed Picture
Those who remember 2020 likely still have a dim view of Wells Fargo. The company was obliged to pay $3 billion after its employees used customer information to create savings and checking accounts without permission, in order to more actively cross-sell products and services.
The scandal not only has its own Wikipedia entry, but also a complete discussion at Harvard Law, ensuring it will never completely go away.
This point isn’t lost on hedge funds, according to TipRanks’ 13-F tracker, which shows that hedge fund involvement with the bank has been in steady decline since March 2020.
Insiders, however, have bought shares, though not all that many. Reports note that insiders bought to the tune of roughly $69,600 in the last three months, which would account for fewer than 1,400 shares at current prices.
Wells Fargo’s dividend history doesn’t help matters here, either, as the company gutted its dividend around 80% back in August 2020. The value has been recovering ever since, but is still under half what it was in May 2020.
Wheat Prices Likely to Explode
Wells Fargo itself is a mild risk, but what’s really going to explode is wheat stocks. Swanson laid the groundwork for this. He noted that U.S. consumers spend around 14% on food.
Of that, cereals and breads account for about 13% of spending. Rising wheat prices will, in turn, send that component of food spending upward.
The grains that make cereals and breads also make a component of animal feed. This in turn makes that feed more expensive and thus meat prices will also rise. With Russia and Ukraine growing roughly 14% of the planet’s wheat, Swanson elaborates, ongoing hostilities will crimp supply.
A range of other views serve to corroborate Wells Fargo’s economists. The Daily Mail recently called upon readers to “dig for victory once again,” encouraging home gardening. Reports of drought in the Plains states of the U.S. — its own breadbasket states like Kansas and Nebraska — note that winter wheat will suffer from extreme drought hitting much of the region.
China’s Minister of Agriculture and Rural Affairs referred to the Chinese wheat harvest as the “worst in history.” This combination of factors suggests issues in a clear majority of wheat-producing regions. That’s likely to send wheat prices on an upward tear for the next few months.
Much of the world’s winter wheat is impacted by current conditions. That means it’s safe to say that food producers should be doing well in response. Indeed, Archer-Daniels Midland (ADM) has been on the rise since last August, though the biggest spikes landed in January 2022.
ADM has added almost $10 to its share price just since January 23. General Mills (GIS) was on a similar upward slope until recent reversals. Ditto Tyson Foods (TSN), though its losses were much narrower than General Mills’ in recent trading.
The real winner here, however, seems to be wheat futures themselves. The Teucrium Wheat Fund (WEAT), an ETF focused mainly on wheat, had to stop issuing new shares.
Why? They were in too heavy of demand. The fund already sold out its 7.4 million maximum, and old shares immediately began selling at a premium.
Concluding Views
Wheat prices will rise from here. Even if peace talks between Russia and Ukraine bear fruit in intense and immediate fashion, that’s still going to leave a lot of wheat producers on the back foot. China’s wheat harvest won’t improve any with a peace deal. Nor will drought conditions in the U.S. improve on such a development.
With multiple wheat producers producing almost as much bad news as wheat, it’s not a positive outlook. That’s going to have knock-on effects throughout the entire food market. Any grain-fed meat will get more expensive to at least some degree. Yes, substitutes are available, but as demand for substitutes increases, so too will their prices.
The success of the Teucrium Wheat Fund bears that much out. So too do recent gains seen at major food producing operations. I may be neutral on Wells Fargo, but I’m certainly bullish on wheat. It’s looking like a serious growth opportunity right now thanks to massive scarcity in the making.
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