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4 Agriculture Operations Stocks Braving Industry Challenges

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Logistical and supply-chain issues, higher costs, and reduced sales continue to mar the prospects of the Zacks Agriculture – Operations industry, thanks to the pandemic-led disruptions. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while.

Nonetheless, the USDA’s agricultural export projections for fiscal 2021 reflect an increase from that stated earlier on robust oilseed and grain export forecast. The success of economic relief programs and vaccination deployments is expected to shape the growth rates and extent of recovery in fiscal 2021. 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) and Adecoagro S.A. (AGRO - Free Report) .

Industry Description

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 products 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. Also, these are 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

COVID-Related Disruptions: The industry participants have been facing increased logistical issues led by the pandemic, which have affected the supply chains across all regions. Most companies witnessed disruptions in the supply of agro-food products to markets and consumers, both within and across borders, hurting producers and suppliers. Agriculture, fisheries and aquaculture companies were particularly affected by restrictions on tourism, and the closure of restaurants and cafeterias. Meanwhile, production and farming continued unabated. Since consumers are largely relying on retail and e-commerce for their food needs, companies have been analyzing purchase and consumption patterns to predict and meet the demand. Economic relief programs, vaccination deployments, containing the spread of the virus, boosting consumer confidence and improving consumption levels are likely to shape the growth rates and extent of recovery in fiscal 2021.

Higher Costs: Industry participants have been witnessing higher costs due to rising raw material, freight and logistics costs. 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. Further, companies are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Moreover, players with flexible supply chains are poised to overcome the pandemic-led disruptions.

Strong FY21 Agricultural Export Projections: According to the USDA, agricultural export projections for fiscal 2021 (ending Sep 30) are $157 billion, reflecting an increase of $5 billion from the figure stated in November 2020. The key factors aiding export projections for the fiscal year are higher oilseed and grain export forecasts. 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. Additionally, increases in export forecasts for soybean, cotton, corn and wheat as well as livestock, poultry and dairy are likely to be beneficial.

Growing Organic Demand: The industry is benefiting from an organic movement prompted by consumers’ increasing demand for healthier food. Agriculturists are adapting to organic production techniques and curtailing the use of chemicals and pesticides. Further, innovations in food processing, improved grain handling techniques, larger storage spaces and strong emerging market demand are conducive to the industry’s growth. Healthy eating habits are expected to accelerate the purchase and consumption of alternative proteins. Moreover, focus on nourishment and wellness is pushing microbiome solutions to the forefront. Also, companies are anticipated to benefit from the introduction of the latest technologies and differentiated product portfolios.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Agriculture – Operations industry is an 11-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #225, which places it at the bottom 10% 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 outperformed the S&P 500 and the Zacks Consumer Staples sector in a year.

The stocks in the industry have collectively gained 71.1% compared with growth of 42.3% for the Zacks S&P 500 composite and 27.3% for the sector in a year.

One-Year Price Performance

Agriculture - Operations Industry's Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 17.22X compared with the S&P 500’s 21.7X and the sector’s 20.81X.

Over the last five years, the industry has traded as high as 17.58X, as low as 10.5X and at the median of 14.53X as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Agriculture Operations Stocks to Keep a Close Eye on

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 three 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 Zacks Consensus Estimate for this Chicago, IL-based leading agricultural products company’s 2021 earnings per share (EPS) has moved up by 9.7% in the past 30 days. The company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Additionally, 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. Moreover, the company remains on track with its Strive 35 sustainability goals and probiotics expansion. Aided by the initiatives, management is optimistic about 2021 and envisions another year of strong earnings growth. This Zacks Rank #2 stock has gained 79.5% in the past year.

Price and Consensus: ADM


Corteva: The stock of this Wilmington, DE-based pure-play agriculture company has gained 75.6% in the past year. The 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. Despite the pandemic-led volatility, 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 2021 has been unchanged in the past seven days. The company currently has a Zacks Rank #3.

Price and Consensus: CTVA



Mission Produce: The Oxnard, CA-based company currently carries a Zacks Rank #3 and has rallied 49.5% in the past year. It 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 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 been unchanged in the past 30 days.

Price and Consensus: AVO



Adecoagro S.A.: 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 stock currently carries a Zacks Rank #3 and has surged 165.8% in the past year. The Zacks Consensus Estimate for the company’s 2021 earnings has increased 11.4% in the past 30 days.

Price and Consensus: AGRO

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