Global grain and oilseed inventories were well below historical average levels entering 2022 due to strong demand and lower supply in recent growing seasons. The Russia and Ukraine conflict led to a tightening of crop export supplies and enhanced food insecurity. This has raised crop prices and heightened the incentive to increase production.
Here are three stocks set to profit from this revival in the agricultural sector.
Corteva, Inc (NYSE: CTVA) is a global provider of seed and crop protection solutions-focused entirely on the agricultural industry. In Q1 2022, the company’s net sales were up 10% year-over-year (YoY) to $4.6 billion. About 44% of this revenue came from North America. The company’s fastest-growing markets include Latin America (25% YoY) and the Asia Pacific (16% YoY). Corteva’s Seed revenues grew by 1% to $2.5 billion due to an 8% increase in price, offset by a fall in volume and unfavorable currency impact due to the strengthening U.S. dollar. Crop Protection revenues were up 23% to $2.1 billion due to an 11% increase in price and an 18% increase in volume.
The company has reaffirmed its full-year guidance for net sales in the range of $16.7 billion to $17 billion, which, at the mid-point, represents a growth rate of 8% YoY. While this is not a huge figure, in current market conditions, all levels of growth are positive signs. The dominant share of income growth came from price increases. It is preferable to see higher volume growth as this shows the company’s product is in demand. Higher prices can be misleading as, in the short-term, this boosts sales and profits, but it is unlikely that customers will accept this for long and may switch suppliers.
FMC Corporation (NYSE: FMC) is an agricultural sciences company that provides crop protection, plant health, and professional pest and turf management products. In the first quarter of 2022, revenue grew 13% YoY to $1.35 billion, while earnings per share were up 23% to $1.88. This increase in revenue was predominantly in North and Latin America, where sales increased by 30% and 25% respectively. This was due to lower inventory levels and increased purchases from fears around supply availability in these markets, making it unlikely to see this growth again.
FMC has a full-year revenue outlook of $5.25 billion to $5.55 billion, representing a 7% YoY increase at the midpoint. However, EPS is forecast to grow at a lower rate of 6% due to rising costs in raw materials and currency headwinds. The company aims to continue to grow volume sales with new product launches which will diversify its portfolio. The majority of sales came from fruit and veg, corn, soy, herbicides, and insecticides. Wheat and sunflower product sales rose in Europe. These products may continue to grow over the coming years as the fragility of Europe’s food system was revealed by the war in Ukraine.
Nutrien Ltd (NYSE: NTR) produces and distributes potash, nitrogen, and phosphate for agricultural, industrial, and feed customers. Nutrien generated record net earnings of $1.4 billion on sales of $7.7 billion in the first quarter. This was due to higher realized prices and strong retail performance, which offset the lower fertilizer sales volume. Retail sales and gross margin increased by 30% YoY, delivering 9% of total EBITDA. The company’s earnings are significantly affected by fertilizer benchmark prices, which have been volatile over the past two years. The war in Ukraine has resulted in a massive increase in fertilizer prices due to sanctions on Russia and Belarus, which provide 40% of potash exports.
Nutrien has also cut its long-term debt by 25% YoY. While this harmed net earnings in the short-run, it is a better play over the long term as rising interest rates will make this debt more expensive. Therefore, this is a smart cost-cutting initiative, which still yielded high earnings. Unlike the other companies mentioned in this article, Nutrien Ltd has raised its full-year guidance, predominantly due to higher realized selling prices, increased potash sales volumes, and higher retail gross margins on crop protection and nutrient products.
Shane Vigna, Author at MyWallSt Blog