The Difference A Year Can Make: Tyson Foods, Inc. (TSN), Sanderson Farms, Inc. (SAFM)

Last year felt like Armageddon in the farming industry. One of the worst droughts ever in U.S. history gripped the Midwestern states and threatened the livelihood of the farming community. Suddenly, things are looking up and — according to the U.S. Department of Agriculture — farmers can prepare for their best year of income in four decades. Apparently the land needed to rest, and for months that was all it could do throughout the dry and sun-scorching conditions.

To be fair, last year was not the worst ever for farm income. Indeed, although harvesting was crippled commodity inflation served as a saving grace for many in the farming business, as prices for the short supply rose.

Now, prices for corn and soybeans are in free-fall even after soaring to record-high levels only months ago. Price reversals are occurring as a result of greater supplies. The USDA predicts that soybean inventories will rise to nearly 9% above year ago levels, and corn reserves are greater than previously forecasted as well.

Food Stocks

Food companies, including Tyson Foods, Inc. (NYSE:TSN), Sanderson Farms, Inc. (NASDAQ:SAFM) and Smithfield Foods, Inc. (NYSE:SFD) faced higher prices for livestock feed, and that created some performance headwinds for these stocks.

In 2012, shares of Tyson were down nearly 30% in August compared with the beginning of last year. The stock eventually rebounded to finish the year close to where the stock began trading in 2012. In 2013, shares of Tyson are up 16% as investors continue down a volatile path with this stock.

The company characterized fiscal 2012 as “great” in its most recent shareholder meeting, despite the challenges.

Last year, Tyson had operating cash flow of $1.2 billion compared with $2.4 billion in gross debt. The company returned to investment-grade status among the ratings agencies, which bodes well for its future borrowing costs and is an improvement that is worth considering.

The effects from the positive shift in the agricultural conditions are already beginning to surface at Tyson. In its fiscal first quarter, Tyson reported a 14% jump in its earnings per share to $0.48. Through a 25% increase in its regular dividend plus a special dividend and share buybacks, Tyson returned $150 million back to shareholders in fiscal 1Q. Still, results would have been better were it not for $170 million in additional food costs during the first quarter amid the commodity inflation.

For the remainder of 2013, Tyson’s plans for its cash flow include ongoing dividends, share buybacks, and expansion via acquisitions. Chief executive Donnie Smith says to expect top line sales growth of between 3%-4% going forward.