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Mixed Near-Term Outlook for Agriculture Operations Industry

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The Zacks Agriculture – Operations industry comprises companies that either produce or procure, transport, store, process and distribute agricultural commodities to consumers and ingredients to other parts of the agriculture industry (like the clothing, animal feed, energy and industrial products’ industries). Some of these players also engage in dairy operations, land transformation activities and development of food ingredients using gene-editing technology.

The industry encompasses production activities related to traditional farming of crops (such as corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). These products are mostly sold at grocery stores or exported overseas. Additionally, 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. Archer Daniels Midland Company (ADM - Free Report) is one of the most prominent players in the industry.

Here are the industry’s three major themes:

  • According to the USDA’s latest agricultural export projections for fiscal 2020, the prospects for the industry are improving. USDA estimates agricultural exports of $139.5 billion for fiscal 2020, which ends on Sep 30 (up $500 million from the November forecast). The improved view is mainly due increase in the export forecasts for soybeans, wheat and poultry. The export forecast for China has increased to $14.0 billion (from $3 billion in November), on expected increases from the Phase One Agreement, mostly related to higher soybean export volume. This outlook is somewhat tempered by uncertainties surrounding the COVID-19 outbreak.
     
  • As coronavirus cases escalate and measures tighten, the global food system remains subject to logistic issues though production and farming continue unabated. In the United States, the agriculture industry was deemed critical, with businesses continuing operations as usual despite restrictions enacted to contain the virus spread. Disruptions are minimal as food supply has been adequate and markets have been stable so far. Initially, flour millers and other agri-based items witnessed excessive demand due to panic-buying trends as quarantine and shelter-in-place orders were enforced. Moreover, the initial logistics-related bottlenecks for movement of goods have largely been resolved. Nevertheless, closure of restaurants and less-frequent grocery shopping has led to reduced demand for fresh produce and fisheries’ products, affecting producers and suppliers. Agriculture, fisheries and aquaculture companies are particularly affected by restrictions on tourism, closure of restaurants and cafeterias, and school meals suspension.
     
  • 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, diversification and strong emerging market demand are conducive to the industry. Moreover, the industry participants remain focused on making investments in assets and technological capabilities to serve customers efficiently and aid overall growth.


Zacks Industry Rank Indicates Bleak Prospects

The Zacks Agriculture – Operations industry is a 10-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #68, which places it at the top 27% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining 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 Lags Shareholder Returns

The Zacks Agriculture – Operations industry has underperformed both the S&P 500 and its own sector in the past year.

The stocks in this industry have collectively slumped 20.7% compared with the Zacks S&P 500 composite that has decreased 3.7%. The Zacks Consumer Staples sector has also declined 13% over this period.

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 12.76X compared with the S&P 500’s 20.18X and the sector’s 18.51X.

Over the last five years, the industry has traded as high as 16.29X, as low as 10.6X, and at the median of 14.13X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


Bottom Line

The U.S. agriculture operations industry is catering to changing consumer preference, including growing demand for organic food products. Despite the restrictions imposed due to the novel coronavirus outbreak, disruptions in the U.S. agriculture business are minimal as food supply has been adequate and markets have been stable so far. However, the industry is exposed to risk of experiencing logistics-related bottlenecks. Also, closure of restaurants and less-frequent grocery shopping has led to reduced demand for fresh produce and fisheries products, affecting producers and suppliers. Nonetheless, going by USDA’s latest agricultural export projections for fiscal 2020, the prospects for the industry are improving.

While none of the stocks from the Zacks Agriculture – Operations universe currently holds a Zacks Rank #1 (Strong Buy), here we have mentioned two stocks with a Zacks Rank #2 (Buy). Additionally, we suggest three other stocks with Zacks Ranks #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.

Bioceres Crop Solutions Corp. (BIOX - Free Report) : Bioceres is a provider of crop productivity solutions. The company's solutions include seeds, seed traits, seed treatments, biologicals, adjuvants and fertilizers. The consensus EPS estimate for the current year for the company has been stable in the past 30 days. This Zacks Rank #2 stock has rallied 21.6% in the past year.

Price and Consensus: BIOX


Cadiz, Inc. : The consensus EPS estimate for 2020 for this Los Angeles, CA-based company has been unchanged in the past 30 days. The company engages in land and water resource development. The company's primary business is to acquire and develop land with water resources for various uses, including groundwater supply, groundwater storage and agriculture. This Zacks Rank #2 stock has gained 4% in the past year.

Price and Consensus: CDZI


Corteva, Inc. (CTVA - Free Report) : The stock of this Wilmington, DE-based company, which was spun-off from DowDupont on Jun 1, 2019, has gained 2.7% since then. The company is currently operating as an independent supplier of agricultural products worldwide. The Zacks Consensus Estimate for 2020 has moved up by a penny in the last 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: CTVA


Limoneira Co (LMNR - Free Report) : This Santa Paula, CA-based company carries a Zacks Rank #3 and has declined 48.7% in the past year. It operates as an agribusiness and real estate development company in the United States and internationally. The Zacks Consensus Estimate for the company’s the current fiscal EPS has been stable for the past seven days.

Price and Consensus: LMNR


Seed Company (SANW - Free Report) : This Sacramento, CA-based company carries a Zacks Rank #3 and has declined 11% year to date. The Zacks Consensus Estimate for the company’s current fiscal EPS has been stable for the past 30 days.

Price and Consensus: SANW


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