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  • wall_street_mayhem wall_street_mayhem Feb 21, 2012 4:57 PM Flag

    FALLING CROP PRICES (article)

    Feb 21 (Reuters) - Corn, wheat and cotton prices are expected to fall - and that could lead to gains in sectors far removed from the farm.


    Lower prices would be welcome news to supermarkets and retailers that have struggled to pass last year's big jumps in commodity prices on to consumers. Analysts say a modest decline in the prices of raw materials could boost investments ranging from teen retailers to emerging markets and help offset higher transportation costs as gasoline prices increase.

    Here are a few ways to play the expected drop in crop prices this year:


    SUPERMARKETS GET RELIEF

    Traditional supermarkets may be one of the bigger beneficiaries of softer crop prices, analysts said.

    That's because stores like Supervalu, Kroger and Safeway have lost market share to Wal-Mart Stores and Target since the recession ended in 2009.

    By expanding their grocery offerings, these retailers have positioned themselves as a one-stop alternative for still-jittery consumers and have used their purchasing size to offer lower prices on items like meat and bread that traditional grocery stores have a hard time matching. Wal-Mart, for instance, now gets more than half of its revenues from grocery sales.

    Easing food prices will likely change, or at least slow, that trend, analysts say. "The supermarkets are going to welcome this relief because consumers are going to go back to purchasing more items" as prices stabilize, said Andy Wolf, an analyst at BB&T Capital Markets.

    Supermarkets will likely get two margin boosts, he said. First, companies won't lower prices immediately as commodities fall, allowing them to both make up for the steep jump in their costs last year and give them relief from higher gas prices.

    Second, customers who are confident that a big price hike isn't around the corner will be more likely to trade up to higher-margin organic or premium products. Supermarkets have a greater selection of these higher-priced goods, which will help lure back any shoppers who switched to a lower-priced competitor.

    The jump in margins would be especially welcome news to Supervalu, which has seen its shares fall 13 percent this year despite the broad market rally that has pushed the Standard & Poor's 500 index up 8 percent. The company, which offers a dividend yield of nearly 5 percent, saw its revenues slide 7.5 percent in 2011.

    Investors have been skeptical on the stock, with 11 of the 17 analysts polled by Thomson Reuters rating the company a hold. But there are other fundamental reasons to like it beyond the expected boost in its margins. Supervalu will likely pay off $500 million in debt in 2012, said John Heinbockel, an analyst at Guggenheim Partners, which should help support its share price.

    He has a price target of $8.75 for the company, a 25 percent increase from its current price of about $7 per share.

    Other supermarket stocks look attractive as well. Kroger, which trades at a price to earnings multiple of 12, is down 1 percent for the year. It offers a dividend yield of 1.9 percent.

    Safeway is slightly more expensive at 15.5 times earnings, compared with the roughly 13 earnings multiple for the S&P 500 index, and comes with a dividend yield of 2.5 percent. It is up 9 percent since the start of the year. The company is also popular with institutional investors, with large positions held by the $33.8 billion Fidelity Low-Priced Stock fund (FLPSX) and the $13.5 billion Perkins Mid Cap Value Fund (JMCVX).
    source: reuters
    http://www.reuters.com/article/2012/02/21/crop-price-drop-idUSL2E8DLANP20120221?feedType=RSS&feedName=cyclicalConsumerGoodsSector&rpc=43

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