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5 Agriculture Operations Stocks to Watch Amid Supply-Chain and Cost Woes
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Logistical and supply-chain issues, higher input costs, and elevated operational expenses continue to mar the prospects of the Zacks Agriculture – Operations industry. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while.
Nonetheless, the U.S. Department of Agriculture’s (USDA) agricultural export projections for fiscal 2021 and 2022 reflect record shipments of soybeans and continued strong demand from China. Investments in assets and technological capabilities to innovate and serve customers bode well for players like Archer Daniels Midland Company (ADM - Free Report) , Corteva Inc. (CTVA - Free Report) , Mission Produce, Inc. (AVO - Free Report) , Adecoagro S.A. (AGRO - Free Report) and Alico Inc. (ALCO - Free Report) .
About the Industry
The Zacks Agriculture – Operations industry comprises companies that produce or procure, transport, store, process and distribute agricultural commodities to consumers and ingredients to other parts of the agriculture industry (such as the clothing, animal feed, energy and industrial product industries). Some industry players also engage in dairy operations, land transformation activities and the development of food ingredients using gene-editing technology. The industry encompasses production activities related to traditional farming of crops (like corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mostly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
What's Shaping the Future of Agriculture - Operations Industry
Higher Costs: Industry participants have been witnessing higher costs due to rising raw material, freight and logistics costs, including constraints in labor and trucking resources leading to higher lead times for deliveries. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while. The companies have resorted to solid pricing strategies to counter the rising raw material costs. The participants are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Players with flexible supply chains are poised to overcome the pandemic-led disruptions. Though the pricing strategies come in to play, the challenges in supply chains and cost inflation are expected to continue hurting margins in the near term.
Elevated SG&A Expense: Companies in the industry continue to face higher SG&A expenses due to higher performance-related compensation, project-related costs, commissions, and variable compensation. The companies are also witnessing higher costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses might continue to have a bearing on the profitability of companies.
Strong Agricultural Export Projections: According to the USDA, agricultural export projections for fiscal 2021 (ending Sep 30) are $173.5 billion, reflecting an increase of $33.8 billion or 24% from the fiscal 2021 level and $9.5 billion from expectations released in May 2021. The projected exports are also likely to outpace the previous record set in fiscal 2014 by about $17 billion. The key factors aiding export projections for the fiscal year are record export volume and shipments for corn and soybean. Continued strong demand from China and the lack of foreign competition are also expected to be conducive for U.S. agricultural exports. Additionally, increases in the export forecast for livestock, poultry, and dairy products are likely to be beneficial. The USDA also outlined projections for fiscal 2022, indicating another record of $177.5 billion for the fiscal year. This is $4 billion higher than the estimated fiscal 2021 numbers. This growth is expected to be backed by continued strong soybean exports along with record exports for sorghum, dairy products, and horticultural products. Increased exports to China as well as Canada and Mexico are expected to accelerate growth in fiscal 2022. Grain and feed exports are expected to be $37.8 billion, marking a $2.2-billion increase from that mentioned in November. Total oilseed and product exports are expected to be at a record $38.3 billion, representing a $2.0-billion increase from that mentioned earlier.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Agriculture – Operations industry is a 12-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #187, which places it at the bottom 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
The Zacks Agriculture – Operations industry has underperformed the S&P 500 but outpaced the Zacks Consumer Staples sector in a year.
The stocks in the industry have collectively gained 17.6% compared with growth of 34.1% for the Zacks S&P 500 composite and 11% for the sector in a year.
One-Year Price Performance
Agriculture - Operations Industry's Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 12.92X compared with the S&P 500’s 21.33X and the sector’s 19.37X.
Over the last five years, the industry has traded as high as 17.41X, as low as 10.5X and at the median of 14.38X as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Agriculture Operations Stocks to Watch
None of the stocks in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy) but we have one stock with a Zacks Rank #2 (Buy). We suggest four more stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at them.
Archer Daniels: The Chicago, IL-based leading agricultural products company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a key growth driver. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.
Management is optimistic about 2021 and envisions another year of strong earnings growth. The Zacks Consensus Estimate for its 2021 earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for its 2021 sales and earnings suggests growth of 23.8% and 33.4%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 28.1%, on average, in the trailing four quarters. The company currently carries a Zacks Rank #2 and has rallied 30.3% in the past year.
Price and Consensus: ADM
Corteva: The Wilmington, DE-based pure-play agriculture company is poised to drive above-market growth through its industry-leading product pipeline and rigorous approach to innovation and operating discipline. It is poised to accelerate its pace of innovation and existing leadership position in the high-value sector to meet the increasing market demand for naturally derived products through three new collaboration agreements. Strong price execution in seed, supply-chain flexibility, and solid market demand for its balanced and differentiated new product portfolios are driving the company’s performance.
The Zacks Consensus Estimate for Corteva’s 2021 earnings has moved down by a penny in the past seven days. The Zacks Consensus Estimate for its 2021 sales and earnings suggests growth of 7.7% and 35.3%, respectively, from the year-ago period’s reported figures. The company has reported an earnings surprise of 67.6%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The stock has gained 49.4% in the past year.
Price and Consensus: CTVA
Mission Produce: The Oxnard, CA-based company is a leader in sourcing, producing and distributing fresh avocados in the United States and internationally. The company has been benefiting from the robust demand for avocados despite the volatility in world markets. Its key partnerships and strategies give it the agility to distribute its products to global consumers despite the supply-chain disruptions posed by the pandemic. The company recently announced its intent to enter the Mango category through its year-round mango program. It sees strong long-term opportunity in the business as mango is the largest consumed fruit in the world. Apart from expanding the global footprint, the mango program is complementary to its business, as mangoes are typically off-season from avocados. This creates a unique synergy for its international farming business.
The Zacks Consensus Estimate for the company’s current fiscal-year EPS has moved down 10.3% in the past 30 days. The Zacks Consensus Estimate for its current fiscal-year sales suggests growth of 4% from the year-ago period’s reported figure. It has reported an earnings surprise of 38.6%, on average, in the trailing four quarters. It currently carries a Zacks Rank #3 and has rallied 34.5% in the past year.
Price and Consensus: AVO
Adecoagro: The Luxembourg-based agro-industrial company engages in farming crops and other agricultural products, dairy operations, sugar, ethanol and energy production, and land transformation activities in South America. The company benefits from the high flexibility of its assets, which is a competitive advantage in the current uncertain market outlook. Its flexibility was reflected by its ability to increase the mix of anhydrous ethanol to benefit from its high prices and recovering demand. The company’s Farming & Land Transformation businesses have been benefiting from the consolidation of the five-year plan investments made in Crops, Rice and Dairy businesses along with its focus on efficiencies.
The company currently carries a Zacks Rank #3 and its stock has surged 93.6% in the past year. The Zacks Consensus Estimate for the company’s 2021 earnings has increased 62.7% in the past seven days.
Price and Consensus: AGRO
Alico: The Fort Myers, FL-based agribusiness and land management company is poised to benefit from strong consumption of not-from-concentrate orange juice by retail consumers, which has been sturdy since March 2020. This has significantly aided market pricing for both Early and Mid-Season, and Valencia season fruit. Driven by the strong consumption of not-from-concentrate orange juice and lower-than-normal levels of processor inventories, the company expects market prices in next year to remain near or above recent levels. In June 2021, it entered new citrus supply agreements with Peace River Citrus Products, covering 3,614 gross citrus acres purchased in May and October 2020. With the latest supply agreements, approximately 99% of Alico’s fruit is under contract through the 2023 and 2024 harvest seasons. The contracts will continue to enable the company to realize competitive margins for the aforementioned periods.
The Zacks Consensus Estimate for the current fiscal year earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for its current fiscal year sales and earnings suggests growth of 15% and 387.5%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 3.3%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The company has gained 21% in the past year.
Price and Consensus: ALCO
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5 Agriculture Operations Stocks to Watch Amid Supply-Chain and Cost Woes
Logistical and supply-chain issues, higher input costs, and elevated operational expenses continue to mar the prospects of the Zacks Agriculture – Operations industry. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while.
Nonetheless, the U.S. Department of Agriculture’s (USDA) agricultural export projections for fiscal 2021 and 2022 reflect record shipments of soybeans and continued strong demand from China. Investments in assets and technological capabilities to innovate and serve customers bode well for players like Archer Daniels Midland Company (ADM - Free Report) , Corteva Inc. (CTVA - Free Report) , Mission Produce, Inc. (AVO - Free Report) , Adecoagro S.A. (AGRO - Free Report) and Alico Inc. (ALCO - Free Report) .
About the Industry
The Zacks Agriculture – Operations industry comprises companies that produce or procure, transport, store, process and distribute agricultural commodities to consumers and ingredients to other parts of the agriculture industry (such as the clothing, animal feed, energy and industrial product industries). Some industry players also engage in dairy operations, land transformation activities and the development of food ingredients using gene-editing technology. The industry encompasses production activities related to traditional farming of crops (like corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mostly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
What's Shaping the Future of Agriculture - Operations Industry
Higher Costs: Industry participants have been witnessing higher costs due to rising raw material, freight and logistics costs, including constraints in labor and trucking resources leading to higher lead times for deliveries. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while. The companies have resorted to solid pricing strategies to counter the rising raw material costs. The participants are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Players with flexible supply chains are poised to overcome the pandemic-led disruptions. Though the pricing strategies come in to play, the challenges in supply chains and cost inflation are expected to continue hurting margins in the near term.
Elevated SG&A Expense: Companies in the industry continue to face higher SG&A expenses due to higher performance-related compensation, project-related costs, commissions, and variable compensation. The companies are also witnessing higher costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses might continue to have a bearing on the profitability of companies.
Strong Agricultural Export Projections: According to the USDA, agricultural export projections for fiscal 2021 (ending Sep 30) are $173.5 billion, reflecting an increase of $33.8 billion or 24% from the fiscal 2021 level and $9.5 billion from expectations released in May 2021. The projected exports are also likely to outpace the previous record set in fiscal 2014 by about $17 billion. The key factors aiding export projections for the fiscal year are record export volume and shipments for corn and soybean. Continued strong demand from China and the lack of foreign competition are also expected to be conducive for U.S. agricultural exports. Additionally, increases in the export forecast for livestock, poultry, and dairy products are likely to be beneficial. The USDA also outlined projections for fiscal 2022, indicating another record of $177.5 billion for the fiscal year. This is $4 billion higher than the estimated fiscal 2021 numbers. This growth is expected to be backed by continued strong soybean exports along with record exports for sorghum, dairy products, and horticultural products. Increased exports to China as well as Canada and Mexico are expected to accelerate growth in fiscal 2022. Grain and feed exports are expected to be $37.8 billion, marking a $2.2-billion increase from that mentioned in November. Total oilseed and product exports are expected to be at a record $38.3 billion, representing a $2.0-billion increase from that mentioned earlier.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Agriculture – Operations industry is a 12-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #187, which places it at the bottom 26% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
The Zacks Agriculture – Operations industry has underperformed the S&P 500 but outpaced the Zacks Consumer Staples sector in a year.
The stocks in the industry have collectively gained 17.6% compared with growth of 34.1% for the Zacks S&P 500 composite and 11% for the sector in a year.
One-Year Price Performance
Agriculture - Operations Industry's Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 12.92X compared with the S&P 500’s 21.33X and the sector’s 19.37X.
Over the last five years, the industry has traded as high as 17.41X, as low as 10.5X and at the median of 14.38X as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Agriculture Operations Stocks to Watch
None of the stocks in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy) but we have one stock with a Zacks Rank #2 (Buy). We suggest four more stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at them.
Archer Daniels: The Chicago, IL-based leading agricultural products company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a key growth driver. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.
Management is optimistic about 2021 and envisions another year of strong earnings growth. The Zacks Consensus Estimate for its 2021 earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for its 2021 sales and earnings suggests growth of 23.8% and 33.4%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 28.1%, on average, in the trailing four quarters. The company currently carries a Zacks Rank #2 and has rallied 30.3% in the past year.
Price and Consensus: ADM
Corteva: The Wilmington, DE-based pure-play agriculture company is poised to drive above-market growth through its industry-leading product pipeline and rigorous approach to innovation and operating discipline. It is poised to accelerate its pace of innovation and existing leadership position in the high-value sector to meet the increasing market demand for naturally derived products through three new collaboration agreements. Strong price execution in seed, supply-chain flexibility, and solid market demand for its balanced and differentiated new product portfolios are driving the company’s performance.
The Zacks Consensus Estimate for Corteva’s 2021 earnings has moved down by a penny in the past seven days. The Zacks Consensus Estimate for its 2021 sales and earnings suggests growth of 7.7% and 35.3%, respectively, from the year-ago period’s reported figures. The company has reported an earnings surprise of 67.6%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The stock has gained 49.4% in the past year.
Price and Consensus: CTVA
Mission Produce: The Oxnard, CA-based company is a leader in sourcing, producing and distributing fresh avocados in the United States and internationally. The company has been benefiting from the robust demand for avocados despite the volatility in world markets. Its key partnerships and strategies give it the agility to distribute its products to global consumers despite the supply-chain disruptions posed by the pandemic. The company recently announced its intent to enter the Mango category through its year-round mango program. It sees strong long-term opportunity in the business as mango is the largest consumed fruit in the world. Apart from expanding the global footprint, the mango program is complementary to its business, as mangoes are typically off-season from avocados. This creates a unique synergy for its international farming business.
The Zacks Consensus Estimate for the company’s current fiscal-year EPS has moved down 10.3% in the past 30 days. The Zacks Consensus Estimate for its current fiscal-year sales suggests growth of 4% from the year-ago period’s reported figure. It has reported an earnings surprise of 38.6%, on average, in the trailing four quarters. It currently carries a Zacks Rank #3 and has rallied 34.5% in the past year.
Price and Consensus: AVO
Adecoagro: The Luxembourg-based agro-industrial company engages in farming crops and other agricultural products, dairy operations, sugar, ethanol and energy production, and land transformation activities in South America. The company benefits from the high flexibility of its assets, which is a competitive advantage in the current uncertain market outlook. Its flexibility was reflected by its ability to increase the mix of anhydrous ethanol to benefit from its high prices and recovering demand. The company’s Farming & Land Transformation businesses have been benefiting from the consolidation of the five-year plan investments made in Crops, Rice and Dairy businesses along with its focus on efficiencies.
The company currently carries a Zacks Rank #3 and its stock has surged 93.6% in the past year. The Zacks Consensus Estimate for the company’s 2021 earnings has increased 62.7% in the past seven days.
Price and Consensus: AGRO
Alico: The Fort Myers, FL-based agribusiness and land management company is poised to benefit from strong consumption of not-from-concentrate orange juice by retail consumers, which has been sturdy since March 2020. This has significantly aided market pricing for both Early and Mid-Season, and Valencia season fruit. Driven by the strong consumption of not-from-concentrate orange juice and lower-than-normal levels of processor inventories, the company expects market prices in next year to remain near or above recent levels. In June 2021, it entered new citrus supply agreements with Peace River Citrus Products, covering 3,614 gross citrus acres purchased in May and October 2020. With the latest supply agreements, approximately 99% of Alico’s fruit is under contract through the 2023 and 2024 harvest seasons. The contracts will continue to enable the company to realize competitive margins for the aforementioned periods.
The Zacks Consensus Estimate for the current fiscal year earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for its current fiscal year sales and earnings suggests growth of 15% and 387.5%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 3.3%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The company has gained 21% in the past year.
Price and Consensus: ALCO