In a terrible time for most stocks, a few sectors have done awfully well. One of them: food.
Archer-Daniels-Midland, the giant food-processing company, surged 39.7 percent in 2022, and General Mills returned 27.6 percent. Indeed, the food sector—which includes agriculture, manufacturing, packaged goods and grocers—has outperformed the averages.
But let’s consider why food stocks have risen and whether the phenomenon is temporary.
Food companies have recently benefited from three factors: drought, war in Ukraine and COVID-19. The western half of the United States has been experiencing a long-term lack of rain. China is also suffering, and half of Europe is drier than it has been since the Renaissance.
Many farmers and ranchers are producing less. Reduced supply means higher prices, which, for many food businesses, means higher profits.
Meanwhile, the war in Ukraine has cut production of wheat and corn from one of the world’s largest grain exporters, pushing up prices around the world.
Finally, the waning of the COVID-19 pandemic has boosted demand for restaurant food, which helps companies such as Sysco, a major distributor to restaurants. Its revenues increased 33.8 percent, and profits were up 31.7 percent for the 2022 fiscal year ending in July.
Of course, food-company expenses—gasoline for delivery trucks, parts for processing machinery, salaries—have also risen with inflation, but in general the companies’ bottom lines have benefited from higher food prices.
The big question is whether food companies will continue to benefit from rising prices. Droughts come and go, and grain prices are already moderating; they peaked last June. The U.S. Department of Agriculture maintains an “All Farm Index” of prices paid for U.S. crops. Those prices were remarkably steady for a decade. The index then shot up between mid-2020 and late 2022, from 110 to 137, but the curve is leveling off. Even in the case of food, higher prices dampen demand and encourage more investment in supply.
Still, there’s no doubt that food stocks are a hedge against inflation, which is one good reason to own them. Another is that, properly chosen, food stocks add stability to a portfolio—especially the big manufacturers with powerful brands. Consider General Mills as well as Mondelez International, Chicago-based maker of Oreo cookies, Tang, Ritz crackers and more. Or Cal-Maine Foods, which sells $2 billion worth of eggs a year.
Food stocks can tank too. Poor management has crushed shares of Kraft Heinz despite its spectacular array of brands. The stock peaked at more than $90 a share in 2017 and now trades at less than half that. But contrarians should note that Warren Buffett’s Berkshire Hathaway owns 26 percent of the company, and he’s not selling.
Guessing when the next war or drought will boost food prices is a fool’s errand. But it makes sense to nourish your portfolio with food stocks. They offer a balanced diet in a time when sectors like technology can upset even the strongest stomachs.
(James K. Glassman is a contributing writer at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
