Funny when folks says they don’t invest in commodities. Its not like oil companies, ag commodity or mining firms are represented in any of those indices…
but thats stock specific. some oil companies do hedge it away. they actually report that on the 10-k. income change based on per dollar movement for crude. But you are right, i know the juggernaut xom does not hedge whatsoever.
A good play is to look at companies who use commodities as a major part of their business. Corn last summer was 9/bushel and now a little over 3/bushel. Who uses a lot of corn? Look no further than Chipotle…any company using commodities as a major part of there business could be considered buy candidates as long as prices stay this low.
^And I’m quite sure that Chipotle’s corn expense is quite high, given the amount of corn they sell in their burritos. So this will definitely cause profitability to skyrocket, since their cost of goods sold has been reduced by 90%.
I recommend buying deep out-of-the-money Chipotle calls on margin, solely based on the $3/bushel corn price.
I believe it was two years ago when corn prices sky-rocketed in the U.S. Companies that come to mind that have corn (and other ag commodities) as important input costs are the agricultural processors, such as Archer Daniels Midland. ADM does other stuff like ethanol (also uses corn as an input) and some proprietary trading on ag commodity markets, but when corn, wheat, soy, etc. prices drop, their input costs drop. Also, importantly, ADM’s working capital gets really strained when the prices of these commodities are high and that really hurts cash flows. When corn prices are low, margins expand and working capital cash flows improve.
If you charted corn prices vs. ADM’s stock price, you’ll see a pretty clear negative correlation between the two assets. To me, ADM has been a clear beneficiary of declining ag commodity prices.
An important thing to remember is that corn prices are highly sensitive to weather conditions during the growing season. This last summer was apparently perfect weather for growing corn in the U.S., so there’s been a ton of supply. Two years ago, the persistent, dry heat was terrible for growing corn and prices skyrocketed on low supply. Both 2012 and 2014 were extreme weather conditions for farmers that had large impacts on pricing, and you can’t expect that to continue (unless you’re trying to play climate change?). I’d be long of corn going into next year after two very good growing seasons in 2013 and 2014 but that’s just my opinion.
I’m not as familiar with Chipotle, but you’ve got other variables at play regarding that comapny (consumer preferences, consumer spending) than just input costs. ADM is more of a pure commodity play.
@Tommy83…good post…I just used CMG as a basic example just to get other members here thinking that commodity investing is not just about the futures price.
I just charted how ADM, CMG are correlated with the price of ZC1, ZS1, ZW1. Pretty close. Due to security settings on my platform I was unable to post the chart here. Anyone with Datastream could drum up any number of scenarios.