Agribusiness Recap: Cotton, Lawsuits and Taxes

While gold (NYSE:GLD), silver (NYSE:SLV), and oil (NYSE:USO) steal the show, let’s take a look at how other commodities (NYSE:RJI) and agribusiness investments have done recently. This week we’ll examine developments regarding taxes, lawsuits, and cotton.

Taxes

International countries are taking a more proactive approach to collecting taxes from companies.  For example, Argentina is putting pressure on big global food companies such as Archer Daniels Midland (NYSE:ADM), Bunge(NYSE:BG), and Cargill (NYSE:MOS) for avoiding taxes.

The national tax agency, called AFIP, is accusing the global food companies on using tax havens in order to reduce tax bills in Argentina.  The tax cases could take months to be decided, but in the meantime, the companies have been kicked of a registry that gives them tax breaks.  Not being on the registry will also make it harder to obtain permits to transport farm products to plants and ports.  Glencore International, who is considering a whopping $9-$11 billion IPO, is also involved in the AFIP accusations.

Argentina appears ready to yet again protect the interests of local businesses.  Back in 2007, a NY Hedge Fund was not allowed to buy a 50% stake in an Argentina electric company.  Later, two local businesses in Argentina bought the stake with the blessings of the Argentina government.  Currently, there are reports that the government is drafting a bill to grant two local businesses at least a 30% stake in all soy exports.  This would be a huge deal for local businesses as Argentina is the world’s largest exporter of soy oil and soy meal.  Furthermore, big global companies may also pursue local businesses in order to gain sales.

It’s unclear if the US will take note of Argentina and follow suit, but local businesses in Argentina stand to gain the most from the tax crackdown on global food companies.

Lawsuits

Yum! Brands (NYSE:YUM) received good news on Tuesday.  The Alabama law firm Beasley Allen, announced it is dropping its beef lawsuit against Taco Bell.  Although the lawsuit is dropped, the beef continues.  Beasley Allen claimed that it dropped the lawsuit since Taco Bell changed its marketing and product disclosure.  However, Taco Bell CEO Greg Creed fired back that Taco Bell has made no such changes.  Either way, investors can rest easy that Taco Bell can reduce its spending on damage control.  After the initial lawsuit was filed and hit headlines, Taco Bell spent $3-$4 million on ads disputing that their taco filling actually contains 88% beef (not 35%).  YUM shares closed 1% higher.  Other quick service restaurants such as Wendy’s/Arby’s (NYSE:WEN) and McDonald’s (NYSE:MCD) closed lower for the day.

When one lawsuit ends, another one begins.  One of the world’s most recognizable companies, McDonald’s (NYSE:MCD), is being sued by a California mother of two.  The mother claims the company violates California consumer protection laws by drawing children into their restaurants by giving toys in Happy Meals.  McDonald’s is claiming no wrong has been done, because the mother has the option of buying a Happy Meal for her kids.  In other, more interesting news, Mickey D’s has received much positive media attention for its one day stimulus program.  On Tuesday, the company set a goal to hire 50,000 US employees, in just one day.  The restaurant industry represents about 10% of the US workforce, and McDonald’s already employs about 1.7 million people worldwide.  The company expects to have the hiring results sometime next week.  Shares closed down .52%, but are up 9% from last year.  The Dow member continues to expand operations and also supports a dividend over 3%.

Cotton

Cotton (NYSE:BAL) has been a great pick for agribusiness investors.  Looking specifically at the iPath DJ AIG Cotton TR (NYSE:BAL), shares are up 27% year-to-date, and have gained 84% in the past 3 years.  The rapid increase in the price of cotton is causing companies to change their business model.

Let’s take a look at the changes being made to your clothes:

One of the smaller effects of the cotton boom will be seen at Aeropostale (NYSE:ARO).  The company is reducing its size on clothing tags in order to squeeze out 5 cents of savings per clothing item.

The world’s largest retailer, Wal-Mart (NYSE:WMT), will be using different blends of synthetic fibers in order to reduce its dependence on cotton and maintain margins.  Investors may also want to consider companies such as Ralph Lauren(NYSE:RL) and Coach (NYSE:COH) that have more pricing control, due to its higher end client base.

Hanesbrands Inc. (NYSE:HBI) is getting close and personal with its cotton saving tricks.  The company is currently developing news products made from flax, instead of cotton.  Around 60% of Hanes’ products contain at least 90% of cotton in them.  How serious is the company about using the flax crop in its products?  Well, Hanes has signed a 10 year deal with sustainable fabrics maker Naturally Advance Technologies.  Hanes estimates that flax will compose about 20% of the fabric content in a small number of items, which should begin to take place in Q3.

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