Profit Opportunity: This Stock Has Been Strong Throughout the Coronavirus Market Crash

First it was bare shelves in local stores. Now headlines about meat processing plant closures have only elevated concerns that we could run out of food in parts of the country.

It’s true some grocery stores have been struggling with restocking. Especially in larger cities, stores will on some days run out of eggs, flour, and other staples.

But this isn’t because there’s not enough food being made.

It’s because our supply chains are having trouble adjusting to the major shifts we’ve seen since early March.

Even the fact that Smithfield Foods, the world’s largest pork processor, had to close down its Sioux Falls, S.D., meat processing plant indefinitely won’t make our meat supply disappear.

The truth is our food supply remains safe and plentiful.

And you can make some nice profits on the overblown panic…

Companies Adjust to What We’re Buying
According to NPD Group, the total number of restaurant orders over St. Patrick’s Day week dropped by 34% compared to 2019. That week is usually a great one for restaurants, so takeout and delivery is clearly not filling the gap left by sit-down service.

But this year, around that time, restaurants, cafeterias, and schools across the country started shutting down. Even in states that didn’t issue orders to close nonessential businesses, people stopped eating out in fear of the coronavirus.

In the span of a few weeks, the supply chains that had been providing food to restaurants, schools, universities, hotels, and convention centers lost most of their demand.

That’s led to the paradoxical situation where, despite empty shelves in grocery stores, we have too much of some kinds of foods.

Take bacon, for example. About 60% of U.S. bacon goes to hotels and restaurants. But now that people are hardly eating in those places, demand has dropped drastically. Bacon cheeseburgers are just not as popular when you have to make them yourself.

In fact, total meat demand in North America has dropped by about 30%. The increasing grocery store sales of ground meats don’t make up for the lack of beef and chicken wing sales at restaurants.

The same is happening to milk, much of which is usually shipped to schools.

And one statistic that I found particularly striking: 70% of seafood in America is consumed outside the home.

Meanwhile, the supply of frozen meats and vegetables is more than sufficient here in the United States. Some food processors are now trying to adjust to this shift in demand by freezing more produce and by shifting food meant for restaurants to go to grocery stores.

That means changing the packaging, and us consumers getting used to seeing some new brands and packaging in our stores.

Which brings us to the recent headlines about our food supply being “perilously close to the edge…”

A Crucial Part of the Food Supply Chain Struggles with Coronavirus
When we think of the food supply chain, what comes to mind are the two ends of it: the farmers and ranchers that make the food and the grocery store workers who put it on shelves for us to buy.

But in the middle, there’s a vast industry of food processing plants. This is where meat is chopped up and packaged, where vegetables are put into bags or frozen, where raw milk is pasteurized, split into cream, milk turned into cheese, and so on.

And it’s in this crucial industry where coronavirus cases have been spreading.

See, in meat processing plants, workers stand “elbow to elbow” to debone, clean, and package our meat. The reason is simple – for efficient processing, you want to minimize the distance the product travels between workers. These same workers have also been lacking protective equipment, much like other essential workers across the country.

The result is that when just a few of these workers get the highly contagious COVID-19 virus, it is easily transmitted due to their working conditions.

On April 12, these issues made Smithfield Foods close down its Sioux Falls, S.D., meat processing plant indefinitely.

Originally the plant was to be shut temporarily for cleaning. But space is tight, and workers have to stand close to each other on the line. The town’s mayor and South Dakota’s governor both appealed to Smithfield to keep the plant closed for longer to stop the spread of the virus.

This plant has 3,700 employees. On April 11, the South Dakota governor announced that 238 Smithfield employees tested positive for the virus. That’s a whopping 55% of the state’s total (though we know numbers like this are skewed by who’s actually being tested versus those who aren’t).

But since this one plant processes 4% to 5% of America’s pork, this shutdown has led to some alarming headlines about meat shortages. Especially since this isn’t the first meat processing plant to be idled because of the virus.

JBS USA recently closed a plant in Pennsylvania, which is set to reopen in two weeks. Also in Pennsylvania, Cargill’s plant that processes steak, ground beef, and ground pork has been closed. And Tyson Foods Inc. (NYSE: TSN) has idled a pork plant in Iowa as more than 24 workers there tested positive for the coronavirus.

Before we go on, let me just reassure you. According to both the U.S. Department of Agriculture and the CDC, you will not catch the coronavirus from meat or from meat packaging. Wash your hands (as you already should be doing when handling any raw products) and cook your meat (which will kill any pathogens on the meat), and you’ll be fine.

In the short term, these processing plant closures are causing some issues for farmers. With fewer places serving meat (restaurants, convention centers, and cruise ships are big purchasers of fresh meat) and fewer plants open to buy their meat, raw meat prices are dropping. Since March 25, lean hog futures have dropped by 35%, while live cattle prices are down 15%.

But there are solutions to this problem.

The administration could help food companies with testing and PPE. And industrial engineers are working on alternatives to space out workers – all of which will help to reassure workers about going back to the plants.

The administration has also pledged to help farmers who are worried that there won’t be enough farm workers to help them with the spring planting season.

Seasonal farm workers mostly come from abroad under a seasonal guest worker program. The White House is currently considering reducing the minimum pay allowed under this program, although this move has opponents who don’t want to lower the wage for these workers or don’t want cheaper guest workers competing with American workers.

Probably most importantly, the Secretary of Agriculture has plans to give at least $16 billion in relief to U.S. farmers.

In the meantime, frozen meats in storage remain plentiful, and the supply chain is slowly adjusting to moving to more ground and frozen meats.

Processing plants are working on spacing out workers to reduce infections. This will slow down processing, and companies are discussing how to make up for this by switching to less labor-intensive forms of meat.

For example, poultry processing plants may switch from supplying deboned chicken to whole chickens, and so on.

So don’t worry about a food shortage – there’s plenty food still frozen to tide us over while the supply chain switches over from supplying food service wholesalers over to direct-to-consumer sales in grocery stores.

Meanwhile, better safety precautions in processing facilities will reduce coronavirus worries and closures, which will see workers coming back.

We may not be getting the variety of foods in stores that we’ve become used to. Whole chickens may replace deboned chicken thighs for a while.

But food will still be available.

And just as these food processing workers have proven to be essential, so have the companies that employ them. This is where your profit opportunity is.

My favorite pick in this area is Hormel Foods Corp. (NYSE: HRL). Hormel is an American food company and the maker of the canned cooked pork, Spam. It also specializes in deli meats, ethnic foods, and pantry foods.

HRL has been strong throughout the coronavirus market crash. Trading around $50, it’s up 10% on the year and 25% since a low on March 12.

Smithfield, the company that closed its pork processing plant in South Dakota, may also be a good play for when it inevitably reopens that facility. It’s currently owned by WH Group Ltd. (OTCMKTS: WHGLY), a Hong Kong-based meat packaging and processing company – though this is less of a pure play and is a lightly traded stock on U.S. exchanges.

— D.R. Barton Jr.

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Source: Money Morning