Investor Spotlight: should you sell the farm for Aussie agriculture?

The global food supply is becoming increasingly insecure.

In this week’s Investor Spotlight, we look at what’s driving global agriculture prices, look into the factors behind growing food insecurity, and home in on three Australian agriculture stocks.

Supply shocks drive food prices higher

Food prices hit record highs last year following a series of supply shocks.

The first shock came from the COVID-19 pandemic. Worldwide lockdowns led to extreme supply chain bottlenecks and massive labour shortages as governments enforced stay-at-home orders for vast amounts of the population.

The situation was only exacerbated by Russia’s invasion of Ukraine, which saw the economy of the so-called “food bowl” of Europe grind to a halt due to warfare and trade blockades.

The surge in economic activity caused by the massive amounts of Government and central bank stimulus added to the historic rise in food prices. Higher demand sent energy prices surging, raising the input costs of many food producers.

On top of that, the rising price of ammonia, which is produced from natural gas and is a key input for fertilizers, also increased production costs and even rendered commodities uneconomical to produce.

What are the risks to food security?

There are several risks to food security that may drive up prices for soft commodities in the future. The first is climate change.

According to the World Bank, some warming of the globe could support food production as some cooler regions become more suited to agriculture.

However, a two-degree increase in global temperatures, a rise that humanity is already on track to exceed, would heavily impact crop yields. More frequent extreme weather events would also destroy agricultural produce.

The next risk is geopolitics.

As was observed following Russia’s invasion of Ukraine, along with the US-China trade war, strategic competition, trade disputes, and outright war can deal sudden blows to the global food supply.

Based on research undertaken by the European Parliament, Ukraine and Russia account for approximately 12% of global food calories traded globally.

Those exports effectively disappeared overnight after the invasion due to blockades and sanctions. As markets de-globalise, tensions or conflicts will constrain food production and trade and keep upward pressure on prices.

The final risk is on the demand side: population growth. According to world vision, more than 800 million people, or roughly 10% of the world’s population, don’t have access to enough food.

Although the growth rate is slowing, the United Nations estimates that the world will add another 1 billion people by the end of the 2030s.

This increase in demand will add stress to an already supply-constrained environment.

Three ASX agriculture stocks to watch

• Elders

Elders is a major producer of agricultural products, along with a provider of services to businesses in the industry, including insurance and financing. The company is a small-cap company with a current valuation of approximately $1.1 billion.

The company reported last week and delivered a poor set of results. Earnings came in below expectations despite stronger-than-expected revenues. The dividend was cut by 5 cents. Guidance was underwhelming at $180 million to $200 million.

Despite the disappointing performance of the stock, analysts remain upbeat about its investment case. Although it may see further downgrades, the consensus price target is at a hefty discount of $9.91. Most brokers suggest a hold; seven hold that recommendation and four a buy.

The upward trend has broken down for Elders. The stock price tumbled last week after the company’s results and after a weak start in 2023, is showing signs of potential capitulation. The weekly RSI is extremely oversold with technical support at $700 giving way.

Elders weekly chart

• Nufarm

Nufarm is a business that specializes in agricultural chemicals and farming technology. The firm has its roots in Australia but markets and sells its products in global markets. It is a small-to-medium cap company with a market capitalisation of $2.2 billion.

Nufarm reported interim results last week and exceeded the low expectations the market had for the business. Revenues smashed expectations, profits rose, its dividend was hiked by 25%, and most importantly, upgraded its outlook for future profits.

Analysts are increasingly bullish on Nufarm shares. Its consensus price target has been bumped to $6.74, with six of 11 brokers covering the stock recommending a buy. The remainder suggests a hold.

Nufarm shares are trending higher, and exhibiting signs of consolidation. Price is carving out a pennant pattern with dips bought at trendline support and the 200-week moving average.

Nufarm weekly chart

• Grain Corporation

Grain Corp trades and stores grain and provides logistics and marketing services for the grain industry. It is a small-cap company and is currently valued at $1.8 billion.

Graincorp posted its earnings a fortnight ago, and revealed an 18% drop in profits. However, the business upgraded its guidance on expectations demand for Aussie grain would remain robust, despite less favourable weather conditions as the climate shifts from La Nina to El Nino.

Analysts have a generally positive outlook on GrainCorp. The stock possesses a buy rating, with four suggesting that action, the recommending a hold, and one a sell. The consensus price target is $9.14.

Following a period weakness, GrainCorp appears to be extending its uptrend. Downward sloping trendline resistance has broken, with the price pushing above the 200-week moving average.

Grain Corporation weekly chart

• Costa Group

Costa Group is Australia’s largest horticulture company and a major food supplier to the country’s retailers. The business has a major presence in the avocado market but also produces and sells a variety of vegetables. Costa Group boasts a market capitalisation of $1.1 billion.

The broker community is neutral on Costa Group shares. It boasts a hold rating amongst 12 analysts, with eight recommending that course of action, three suggesting a buy, and one a sell. The stock is in a downgrading cycle and the consensus price target is $2.89.

Costa Group shares are in a primary downtrend. However, price action is pointing to a potential bottoming process, with higher lows emerging and the daily RSI indicating a bullish divergence.

Costa Group weekly chart