Intense heat, a pandemic and a war in Ukraine. Rarely has the world seen such a confluence of disasters threatening the food supply. Barron’s was looking for companies that could fight food shortages with their innovative technology.
Even before the war in Ukraine, food prices were rising. According to the UN, almost one in three people worldwide – a total of 2.3 billion people – had no access to adequate food in 2021, 350 million more than before the pandemic. It is estimated that 702 to 828 million people in the world suffered from hunger.
The Russian invasion of Ukraine exacerbated the problem and cut off world exports from that country. And the extremely high prices for fertilizer threaten next year’s harvest yield. The result is an unprecedented global hunger crisis, according to the UN.
There are signs that momentum is turning, but food security is an issue that won’t go away next year, said Joyce Chang (JPMorgan), who expects global food inflation to moderate in the fourth quarter.
Agricultural technology as a solution
Agricultural equipment, seed and fertilizer companies can mitigate the effects of a global crisis by helping to get more food from less land, increasing profits. These are examples of companies that use innovative technology to make food production more efficient.
By using new technology, these companies are trying to make food production more efficient. For example, Deere and CNH Industrial are leveraging drones, robotics and navigation systems along with data analytics to improve production. Last year, $10.5 billion in venture capital was raised for agricultural technology innovation. According to the UN, 52% of all agricultural land is affected. Haim Israel (Bank of America) states that nature now uses it 1.7 times faster than the Earth’s biocapacity can regenerate. He says that based on current trends, this will have increased to 2 times by 2030.
The risk of increasing social unrest
The risk of unrest from food inflation is greater than it has been in a decade, says Eurasia Group analyst Peter Cetti. This is already being felt in Sri Lanka and Peru. Higher food prices are putting pressure on US food banks as more people line up for help. Food price increases are even more painful for low-income countries.
Politicians are taking measures to contain social unrest, but these threaten the already strained fiscal situation of these countries. Securing domestic food supplies is a priority, but in some cases it comes at the expense of free trade, exacerbating shortages and price increases.
The Big Five feed 60% of the population
About 60% of the world’s food production comes from five countries: China, the United States, India, Brazil and Argentina. Concurrent shocks to grain production are increasingly likely in coming decades due to extreme weather events, McKinsey consultants fear.
World leaders will need to make a concerted effort as about 60% more food than in 2010 will be needed to feed the global population of an estimated 9.7 billion people by 2050, the UN said.
Part of the solution lies in more efficient agriculture. As a result, demand for companies such as Deere and CHH Industrial is increasing. They face the challenge of increasing efficiency by radically transforming agriculture as farmland is depleted by more frequent droughts, wildfires and floods.
Farmers with data from Deere
Deere has a dominant market position. As a result, the company is more profitable than its competitors and has a large R&D budget. Dmitry Khaykin, fund manager of the ClearBridge Large Cap Value Fund, is positive about the stock. The self-driving machines in the countryside will lure talent away from Google’s Waymo.
Collecting data gives Deere an attractive business model. Subscriptions now make up less than 1% of sales, but the CEO believes this could grow to 10% by the end of the decade, making the business less cyclical. Khaykin expects profits to increase by 10% to 15% in the coming years.
CNH Industrial is catching up
CNH Industrial is Deere’s rival and is an even cheaper solution. The company sells brands such as Case and New Holland. In January, the agricultural activities were split from the trucks. The market has not yet been able to appreciate that, says David Herro from the Oakmark Global Select fund.
The stock is down around 30% and the company is undervalued. It has made successful investments in precision agriculture, which are important for productivity. According to the CEO of CNH, the group is catching up. In a few years it will be as good or even better than Deere, says the fighting spirit. Analysts expect the company’s net income to fall 4% this year compared to a year ago, but recover next year. Analysts are relatively optimistic about the stock.
Corteva is profiting from the spin-off
Corteva invests massively in research. About 8% of sales are dedicated to research and development of a new generation of technology to improve crop yields, increase production and reduce variability in production from year to year, regardless of the weather.
The company was spun off from DowDuPont in 2019. It is the combination of DuPont’s Pioneer seed business, which sells genetically modified and conventional seeds to farmers worldwide, and Dow’s crop chemicals. Corteva has used its strong market position to generate stable growth in revenue and profit. Analysts expect sales to grow by an average of 5% per year between 2022 and 2025, and profits to increase by an average of 13% per year over the same period.
Fertilizer manufacturer ICL Group
In the short term, fertilizer prices are one of the biggest concerns for farmers. ICL Group produces phosphate and potassium fertilizers, which are not produced with natural gas as nitrogen. Analysts expect ICL’s revenue to reach $10.3 billion this year, up from $7 billion last year on rising fertilizer prices. Estimated earnings per share in 2022 are $1.82, compared to about 60 cents in 2021.
The shares trade at 5 times estimated 2022 earnings. Abhay Deshpande of Centerstone Investors sees the company as attractively priced with a solid 10% dividend yield. The company’s free cash flow has more than covered its dividend in recent years and should continue to do so in 2023. ICL Group shares rose 25% in the first quarter, but that changed as commodity prices fell.
Agricultural ETF or startups as an alternative
Investors can also take advantage of these trends by using an ETF, such as iShares MSCI Global Agriculture Producers ETF. Recently launched iShares Emergent Food & AgTech Multisector ETFwhich invests in companies that increase agricultural yields, improve the efficiency of food production or reduce waste, create alternative proteins that use less land and water, and producers of sustainable food and packaging materials.
Finally, a new group of start-ups is also attracting the attention of investors. In the short term, rising interest rates and inflationary pressures pose a challenge, but investors are finding newer ways to tackle the food security problem at startups.
Bioceres Crop Solutions for example, producing organic alternatives to synthetic chemicals and drought-tolerant seeds. Vertical and indoor farming increases production density, is less vulnerable to climate change and often uses automation. Local Bountic grows leafy vegetables using vertical and greenhouse farming, while Kalera use big data and automation to improve lettuce yields. These three companies are not attractive enough to buy at the moment, but it is good to keep an eye on their technologies.
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