Goldman Sachs Calls For Much Lower Food Prices (GS, ADM, BG, TSN, SFD, KFT, CAG, GIS, K)

Analysts at Goldman Sachs Group Inc. (NYSE: GS) have reversed a forecast from just two weeks ago suggesting that corn, wheat and soybean prices would be higher due to reduced harvests this fall. Following yesterday’s U.S. Department of Agriculture announcement on acreage planted, the investment bank is now cutting forecasts for futures on corn, wheat and soybeans.

Goldman predicts that prices will remain high this fall, but that by December 2011 the price of a basket of farm products will be lower than it was 12 months earlier by an estimated 7%. By the looks of today’s prices for corn and wheat, Goldman may have gotten this one right.

Corn is down nearly 6%, at $6.11/bushel and has fallen below the price of wheat, which is currently trading at about $6.15/bushel. Corn has been trading higher than wheat for about two weeks or so, a condition so unusual that it’s happened only twice before in nearly 30 years.

Falling prices for grains could be good news for food processors like Archer Daniels Midland Co. (NYSE: ADM), Bunge Ltd. (NYSE: BG), and privately held Cargill. Producer/distributors like Tyson Foods, Inc. (NYSE: TSN) and Smithfield Foods Inc. (NYSE: SFD) could also profit, along with consumer products makers like Kraft Foods Inc. (NYSE: KFT), ConAgra Foods Inc. (NYSE: CAG), General Mills Inc. (NYSE: GIS) and Kellog Co. (NYSE: K).

All these companies are showing share price gains for the first six months of 2011, with ADM up just marginally and ConAgra up near 15%. For the past year, Smithfield share price rose about 50%, Bunge about 39%, and the laggard, General Mills, about 5%. And that’s with higher prices all along the value chain.

If Goldman is right about a price drop, however, the fourth quarter of 2011 and the first half of 2012 could be even better for Smithfield, Tyson, ConAgra and the other consumer products makers because the costs will fall faster than their prices. Retail prices are sticky compared to commodities prices, and that could even give ADM and Bunge a little boost as they try to hold onto higher prices as their costs drop.

Now the real weather watching begins because the crops are in the ground and the right mix of rain and sunshine can mean the difference between a big crop and a mediocre one. If the crop year produces the harvests that Goldman expects, these food companies could see some good harvests of their own.

Paul Ausick