With job openings hitting their lowest levels in six months, the focus has shifted to other economic indicators to gauge the overall improvement of the U.S. economy amid speculations of withdrawal of the economic stimulus, or QE3 tapering.
The U.S. agriculture sector is one bright spot in the economy that has caught the eye of investors with expectations of a strong farm income, record farm wealth and a healthy farm debt-to-asset ratio.
USDA’s ERS (U.S. Department of Agriculture’s Economic Research Services) anticipates national net farm income to reach a record level of $120.6 billion in 2013, despite a severe and extensive drought in 2012. Farm asset values, which mirror farm investors’ and lenders’ long-term profitability expectations, are projected to rise 7% year over year to a record $3,010 billion in 2013.
Consequently, the farm debt-to-asset ratio is expected to fall to 10.2%, its lowest level since 1960. In addition, total farm debt is forecasted to rise to $308 billion in 2013, while farm equity is projected to reach a record high of $2,702 billion.
The annual U.S. net farm income is arguably the most important metric of the farm sector’s well-being, reflecting the aggregate economic activity encompassing production processes, input expenses and marketing conditions of the sector. Together with the measure of the national debt-to-asset ratio, it offers a key indicator of the economic well-being of the farm economy – one of the foundation pillars of macroeconomic growth.
Inherent Sector Strength
The success of the U.S. agricultural sector primarily hinges upon strong demand for agricultural exports, which have risen significantly over the years. Agricultural exports aggregated $135.8 billion in 2012 and are projected to reach $142 billion in 2013. Trade surplus in agricultural goods reached $32.4 billion in 2012.
Rising incomes, a growing middle class in emerging countries, evolving dietary patterns and demand for organic food items are increasingly making the developing countries net importers of farm products, thereby benefiting developed countries like the U.S.
Domestic consumers are also reaping the benefits from a highly efficient agricultural sector. Primarily, with their increasing real incomes, most Americans have changed their food choices to include higher value foods like better cuts of meat, variety of fruits and vegetables, and organic and specialty food items.
Organic farming is currently one of the fastest-growing sectors in agriculture, with double-digit growth in sales. Technological innovations and widespread adoption of a series of biological, chemical, mechanical and organizational advances have enabled farmers to better adjust feed mixes and climate controls to meet the needs of crops and livestock to improve total productivity.
3 Top Agricultural Picks
Amid such strong industry fundamentals, there are certain agricultural stocks with attractive valuation metrics backed by a solid Zacks Rank #1 (Strong Buy). Let’s take a closer look at these companies that appear to be well positioned to benefit from the solid sector dynamics.
Amira Nature Foods Ltd. : Based in Dubai, the United Arab Emirates, the company processes, distributes, and markets packaged specialty rice and value-added meals, ready-to-eat snacks, edible oils and dairy products for retailers under the Amira brand name. At the same time, the company sells maize, sugar, soybean meal, onion, potato, and millet for trading firms across the globe.
Amira has a forward P/E and long-term earnings expectation of 10.27x and 46.00%, respectively. The stock has retained the Zacks Rank #1 (Strong Buy) over a fortnight and had an earnings surprise of 110% in the last reported quarter.
Calavo Growers Inc. (CVGW - Snapshot Report): The company trades at a forward P/E of 24.73x and has a long-term earnings expectation of 13.00%. Headquartered in Santa Paula, CA, Calavo markets and distributes avocados, prepared avocados, and other perishable foods to food distributors, produce wholesalers, supermarkets, convenience stores and restaurants worldwide. The stock was upgraded to a Zacks Rank #2 (Buy) on Sep 7, before rising to its current Zacks Rank #1 (Strong Buy).
Fresh Del Monte Produce Inc. : Based in George Town, Cayman Islands, the company has a forward P/E of 14.19x. The company produces, markets and distributes fresh-cut fruit and vegetables worldwide in addition to the manufacturing of plastic and box products including bins, trays, bags, and boxes. The stock has retained its Zacks Rank #1 (Strong Buy) since Aug 31.
The U.S. agriculture sector had performed relatively better than other sectors in the economy during the Great Recession and its immediate aftermath. A vibrant U.S. agricultural sector is essential for the overall growth and prosperity of the nation and these high-potential stocks with strong fundamentals pledge a healthy ROI during this uncertain time.