Long list removal (PPC)
We are removing Pilgrim’s Pride from our long list. We recently lowered the company on our position monitor after Q2 results, despite reporting significant upside vs. expectations. We raised our projections for industry supply after the Q2 report, causing us to reduce our upside case. Since the Q2 report we have become incrementally more concerned about off-premise demand with a weakening outlook for the consumer.
Corn prices have also started to rise in the past month as crop conditions worsen due to the weather in the Western corn belt. The shares have underlying support with JBS’ previous $28.50 offer and an under-leveraged balance sheet.
We do not see a significant downside to shares, but our upside case has been reduced. We have a number of long ideas with more potential upside, better visibility, and conviction below:
Early harvest (NAPA, VWE)
The current heatwave in California is causing winemakers to harvest early. Excessive heat can lead to shriveled and sunburned grapes, stop the ripening, and result in high measures of grape sugar. Many winemakers are scrambling to harvest grapes as quickly as possible to avoid damage to their crops.
The growing season in California has been uneventful except for a spring frost across the North Bay region. The current weather has resulted in one of the earlier harvests in Sonoma County, two weeks ahead of a “normal year.” Some varieties are more susceptible to hot temperatures than others. According to growers, white grapes like chardonnay, sauvignon blanc, and pinot gris as well as red grapes like pinot noir and merlot are the most likely to be impacted. Pinot-noir ripens very quickly so farmers are rushing to harvest the grapes, prioritizing the high-tier first. With the crushing facilities working around the clock, some grapes will have to remain on the vine and wait while others were picked a month ago.
California strawberries (STKL)
Strawberry prices were up 14% YOY in mid-August to $16 per flat for the non-organic products as seen in the chart below. Production in 2022 has rebounded 9% from 2021. 91% of the U.S. crop is grown in California. The state’s new regulations, wage pressure, water scarcity, and weather have made it more difficult for farmers. SunOpta moved its sourcing and processing from California to Mexico last year. The strawberry quality in Mexico was described as good while the California quality was described as average. California only represents 10% of SunOpta’s production now. Processing costs and reliability of harvest are two key advantages for SunOpta in Mexico. Both fruit-based and plant-based businesses have undergone considerable changes to improve their margins and future growth rates. SunOpta is a best idea long.
