Business schools often teach what's known as the “price elasticity” of demand. It's a fancy way of saying that no matter how expensive something gets, people still tend to buy it.
Gasoline and electricity are good examples of items where demand is inelastic, this is, people buy them with some degree of regularity even when prices go up. Men’s clothing? Not so much.
How about food? In today's economy of rising food prices, food companies like Kraft (KFT), Bunge (BG) and Archer Daniels Midland (ADM) would seem like good buys.
They are growing. Take ADM. The company said it would acquire for an undisclosed sum a soybean-crushing and biodiesel facility from Prairie Pride, a deal in which ADM forms a partnership with Prairie Pride in its biodiesel business.
The company's net earnings rose 29 percent during the second quarter of 2011 to $732 million in part due to recovery of the ethanol industry, which should only get better now that U.S. regulators are going to allow more ethanol in gasoline at the pump.
Time for a Breather
Still, keep an eye on analysts’ opinions. High expectations can be hard to attain sometimes.
Kenneth Zaslow of BMO Capital Markets recently downgraded ADM to market perform on expectations that ethanol and oilseed crush margins may not meet company benchmarks, and also because Archer Daniels Midland has already reported several strong quarters, reports the Associated Press.
Strong business is prompting analysts to downgrade other food giants like Kraft. The company's share price has been climbing to the point that JPMorgan Chase has downgraded the company stock to neutral.
"The company's performance in its North American market continues to languish, with market share and product velocity issues that will not be quickly resolved, in our view," JPMorgan analyst Terry Bivens writes in a note to clients.
Translation: Consumers will buy less Oreos from Kraft if prices keep climbing. Inelasticity in action.
Some agribusinesses have room to grow. Deutsche Bank just upgraded Bunge's stock to buy on the thesis that the market has factored into pricing weaker results in the company's sugar business.
"Lower sugar volume for 2011 is known by the market, while the fertilizer business should be solid, given farm economics,” notes the bank. “Agribusiness results turn to Brazil seasonally, where margins and supply visibility are strong.”
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