Archer Daniels-Midland: Why I'm Ready to Buy

Hitting a 52-week low Thursday was Archer Daniels-Midland Company (ADM). According to Standard & Poor's ADM is, "...one of the world's leading agribusiness companies, with major market positions in agricultural processing and merchandising."

ADM is also the largest processor of corn, oilseed, wheat and other grains.

ADM is heavily associated with the commodity cycle which has either seen it's peak and has a long way to fall or is mercilessly punishing traders and bandwagoners as it goes through a primary bull market correction.

If you're interested in learning about commodity cycles, then read Jim Rogers books Hot Commodities or A Bull in China. Personally, I watched this stock go through the wringer during the period from September '97 to September 2000 all the while debating whether to buy the stock.

What is most fascinating about this stock is the fact that it went up from July '82 until the peak of September 2000. Why would this be so unusual? Well, for one thing interest rates were experiencing their great migration to their 40-year lows. The fact that commodities in general and corn producing companies stock moved up during this period is amazing. Many attribute the rise in price with the increase in population.

However, the population estimates were nothing exceptional. After all, a 1967 estimate cited in Aramco World showed that population was expected to be 5.7 billion by 1990. Of course the actual year this was reached was 1995. Well that must explain everything. It was the population growth that allowed for the increase in the stock of ADM from '82 to '97.

Actually, population growth doesn't quite explain the rise in ADM stock. In January of 1982, the CBOT futures price of corn stood around 271 and declined to the level of 162 in 1986. Corn then vacillated between 270 and 375 with a spike to just above the 500 level in 1996 before sliding to the 256 level throughout much of 1997. Corn only crossed the 500 level in January 2008 a period of 12 years since the last spike in that direction.

Basically what I have described is a trading range since 1982 with a spike in 1996 and 2008. As recently as June/July of 2008 the price of corn peaked at a high of 775 and has since fallen to the current 539 level. Nothing that I have shown would indicate that ADM should have had such a run-up in price from the 1982 bottom of $1.48 to the high of $19.69 in 1997.

When applying Dow Theory to ADM we find that there is interesting precedent for what might happen to the current stock price. As mentioned earlier in the period from July 1982 until September 1997 the stock increased 1,262%. Dow's Theory states that the ADM should retrace either 1/3 or 2/3 before recovering to new highs. In the case of ADM, it retraced 2/3 of the increase by falling to the level of $8.21 or $0.66 above the exact 2/3 level.

Applying this approach to ADM's rise from the low in September 2000 until December 2007 we find that there are four critical support levels. The first support level was $33.69, which the stock broke through with some hesitation back in June. The second support level, according to the 50% Principal, at $27.32 was grudgingly broken through in the month of August. The next stop for the 3rd and final support level before total collapse is $20.95. It is the $20.95 level that corresponds to the 2/3 retracement from 1997 to 2000. This would lead me to believe that with the stock at $22.97 we are near either the end of this downturn or headed back to the September 2000 low of $7.80.

Considering that corn has a cyclical pattern to it, the month of September should mark the reversal of this stock. With ADM increasing its dividend every year for at least 33 years I feel this stock will be worth the risk at or around $20. Put this on your watchlist, do your research and be ready to buy.

Sources:

• Carmicheal, Keith. "Oil in 1990". Aramco World. July/August 1967.
• TFC Commodity Charts
• CME Group

Disclosure: None

Comments

[andyn:]

isnt this selloff due to the ethanol boondogle? and with both candidates promising to remove that subsidy, ethanol might collapse. This stock is not going to retrace any of its highs anytime soon... maybe $24 is all it would do.

2008 Sep 07 12:44 PM

[Dividend Inc:]

Thanks for your comments Andyn.

This stock’s movement could be related to the ethanol subsidies offered by the U.S. government. However, the decline in ADM is not unique. Look at the majority of the stocks in the commodity sector and you’ll see that they have all declined precipitously relative to other industry groups outside of banking and insurance.

Regarding your thought that the price wouldn’t retrace the highs any time soon is obviously a challenging one to answer. If you ask anyone at the peak of a stock price they’ll often tell you that it can’t possibly go down and vis versa. However, I will respond by pointing out that it took the years from 2000 to 2005 for the stock to retrace the peak of 1997. In that regard, you’re right, five years seems a bit long.

However, the purpose of Dow’s Theory is to determine a point that you can expect to buy the stock. For this reason, if the stock fell to the $7.80 or 2/3 level and you bought it in September 2000 you would have likely sold the stock at $14.33 in February 2001. A gain of 83.7% in 5 months. If you were confident of Dow’s Theory then you would have kept the stock at least until the $25 dollar level in January 2005 or possibly the $46 high in May of 2006 a gain of 220% and 489% respectively.

Only time and the nerve to buy will tell the story on this stock. I will be tracking this stock on the blog for the benefit of those who wish to see which story will prevail. Thanks again and visit Dividend Inc. when the stock is at the $22-$20 level.

2008 Sep 09 04:03 AM