2 Stocks Profiting from High Food Prices

To balance your portfolio, consider stocks that profit from increased commodity prices.

With growing food prices eroding consumers' wallets, it's time to start looking for methods to profit from rising prices. Two names that come to mind are agricultural machinery behemoth Deere & Company (DE 1.32 percent) and crop protection and seed firm Corteva (CTVA 1.87 percent ). Both are excellent approaches to the theme.

Given the continued strength of agricultural prices, demand for Deere's equipment appears secure, and the company's pricing power means it can deliver margin expansion and profit growth even if food prices remain high.

1.Deere is a buy

Following its recent second-quarter earnings release, the agricultural and construction equipment company's stock was severely discounted. The issue isn't that Deere isn't getting solid orders for its agricultural machinery. In fact, management stated on the earnings call, "At this point, our order book expands through the remainder of fiscal '22 and even into early fiscal '23 for some product lines."

Instead, Deere's issues are figuring out how to reach its production targets in the face of persistent supply chain bottlenecks and component shortages that slowed output in the first half, as well as lowering its full-year cash-flow projection. For context, management had forecasted operating cash flow of $6.2 billion to $6.6 billion, but recently reduced that forecast to $5.6 billion to $6 billion.

However, both of these difficulties may become obsolete in the long run. First, as the economy continues to open up after long periods of pandemic-related limitations, many of these supply chain concerns are likely to be resolved. Second, the reduction in cash-flow guidance is due to increased working capital requirements. In other words, Deere is spending more money on inventories (for equipment that will be shipped), and the delays in shipments are limiting cash-flow creation. However, the equipment will be sent eventually. Deere is still obtaining great pricing for its products; price accounted for 11 percentage points of the 13 percent growth in production and precision agricultural revenue in the quarter.

Given the continued strength of agricultural prices, demand for Deere's equipment appears secure, and the company's pricing power means it can deliver margin expansion and profit growth even if food prices remain high.

2.Corteva is making outstanding progress on its strategic objectives.

Crop price increases occur at an advantageous time for crop protection and seed business Corteva. The company is undergoing a strategic transition to increase sales and increase profit margins to those of its peers.

There are two primary motivators. The first is to increase sales of its own patent-protected products. Enlist seed characteristics and crop protection (herbicides) are two examples. The seeds and herbicides work in tandem because the seeds include Enlist characteristics that make them resistant to Corteva's herbicide. Selling more seeds under its own patent is a significant advantage since it allows Corteva to minimize the royalty payments it makes to other companies to use their technology. Indeed, CEO Charles Magro stated on the most recent earnings call that "the Enlist Seed platform is performing extremely well beyond our expectations."

The second reason is the company's operational restructuring, which activist hedge funds have pressured management to do. Magro took over in November and has already begun restructuring the company to operate on a global business unit basis, with two new leaders selected to oversee the seeds and crop protection sections. While there is no guarantee that the modifications will be successful, they demonstrate management's commitment to increasing sales and margins. Furthermore, when end markets are favorable, restructuring a corporation is much easier. Everything points to Corteva staying on pace to accomplish its strategic goals.

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