Bunge (BG), which has a big business in finished corn products, is buying Corn Products International (CPO) for $4.4 billion. CPO’s name pretty much says how it makes its money.
The price is a 25% premium to the Corn Product’s recent share price, which is an awful risk for Bunge. According to The Wall Street Journal, "Buying Corn Products will give Bunge a presence in nearly every step of the so-called corn value chain."
The fact that the price of corn and other agricultural commodities is rising could be viewed as good for Bunge. It could also be viewed as very, very bad.
Bunge and its peers are operating in a market where corn price have spiked up 20% in recent weeks due to flooding in the Midwest. The rise in the commodity may allow Bunge to increase revenue, but it may quickly lose the opportunity to pass along the costs of raw goods to its customers. As the price of corn flakes and bread moves up, consumers may simply buy less. Bunge and Corn Products customers like Kellogg (K) and Coca-Cola (KO) may not be able to increase sales as expensive corn bread drives people to find food alternatives which as not as expensive.
Wall St. has started to catch on to the substantial gross margin risks at Bunge. Its shares are only up about 5% so far this year. Bunge is getting caught in the food inflation cycle and its earnings could be damaged as the second half of the year comes around. The CPO deal may end up as an example of how a fool and his money are soon parted.
Douglas A. McIntyre
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