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What Do Falling Food Prices Mean for These Stocks?

Story Highlights

A drop in food prices may be a positive sign for those hoping for inflation to cool down. However, it may squeeze the profit margins of some companies in the food supply chain.

The global prices of major food commodities such as wheat and corn have declined in recent weeks from record highs reached in March after Russia invaded Ukraine, according to The Food and Agriculture Organization’s (FAO) figures. FAO, a specialized agency of the United Nations, is focused on promoting global food security. However, the prices still remain significantly elevated compared to where they were a few years ago.

The resumption of grain exports from Ukraine is expected to further ease the global food shortage and put downward pressure on prices. The falling food prices may impact companies in the food business differently.

In this piece, we highlight Bunge (BG) and Archer Daniels Midland (ADM), the two dominant players in the global supply chain of agricultural commodities.

Grain Trading Companies May See Pressure on Profit Margins

Bunge and Archer Daniels Midland dominate the global supply of agricultural commodities such as wheat, corn, and soybeans. The business has been booming for Bunge and Archer Daniels Midland amid the high food prices, with the companies reporting strong earnings in recent quarters.

As food prices begin to fall, Bunge and Archer Daniels Midland may see pressure on their profit margins. However, they may still report strong sales because of the robust demand for food.

Food Processing and Retailing Companies May See Relief

As food costs soared, restaurants and food processing companies responded by hiking their product prices. For major food brands such as Unilever (UL) and Kraft Heinz (KHC), raising prices for their products to offset the high costs also meant that they risked losing customers to competitors offering cheaper prices. As a result, the falling food prices may bring some relief to food processors and retailers.

Bunge Stock Remains a Wall Street Favorite 

On July 28, Bank of America Securities analyst Steve Byrne maintained a Buy rating on Bunge stock and raised the price target to $138 from $135. The analyst’s new price target indicates 47.1% upside potential.

Consensus among analysts is a Strong Buy based on six Buys and one Hold. The average Bunge price forecast of $125.29 implies upside potential of 34% to current levels. 

TipRanks’ Best-Performing Portfolios Are Buying Bunge Stock

TipRanks’ Stock Investors tool shows that investor sentiment is currently Very Positive on Bunge, with 14.3% of the best-performing portfolios tracked by TipRanks increasing their exposure to BG stock over the past 30 days.

Bloggers Are Strongly Bullish on BG Stock

TipRanks data shows that financial blogger opinions are 92% Bullish on BG, compared to a sector average of 72%.

Final Thought

While the sign of falling food prices is generally welcomed as it may help reduce the upward pressure on inflation, food commodity trading companies may see a drop in their profit margin. On the other hand, for food processing and retailing companies, falling commodity prices may help them protect against customer churn.

Inflation may abate a little as a result of the Ukraine grain export deal and supply chain improvements. However, there may not be much relief for consumers and investors as the economy appears to be heading towards a recession, where many people may lose jobs and companies experience declining sales.

Read the full Disclosure

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