• Thu. Sep 22nd, 2022

Inventories to Consider in the Context of Changing U.S. Agriculture Industry Dynamics

ByStephanie M. Akbar

Aug 18, 2022

As the resumption of grain exports from some Ukrainian ports has calmed rising food prices, the United States is set to witness the lowest cotton production in more than a decade, opening the lead to a sharp rise in its price. .

While food processing stocks like Archer Daniels Midland (NYSE: SMA) and the Conagra brands (NYSE: CAG) should benefit from lower food prices, higher cotton prices could prove beneficial for companies like Farmland Partners Inc. (New York Stock Exchange: REIT).

Now let’s take a closer look at the factors influencing the US agricultural industry.

The grain export agreement between Russia and Ukraine in July

In order to manage the severe food crisis, the July Grain Export Agreement was signed between Russia and Ukraine. The agreement, brokered by the United Nations and Turkey, is currently signed for a period of 120 days and is renewable. As a direct consequence of the agreement, Ukraine can export up to 5 million tonnes of grain per month, which corresponds to its pre-war level.

As part of the agreement, permission was given to 21 vessels carrying corn, wheat, sunflower meal, soybeans, sunflower oil and other products, which weighed around 563,317 metric tons, according to the United Nations (according to a the wall street journal report).

The timing of the deal is important because 18 million tonnes of grain were in Ukrainian warehouses in July. In addition, an additional 65 million tons of stock will be produced from the country’s summer harvest.

According to a the wall street journal article, Ukraine was responsible for supplying around 10% of the world’s wheat demand and acted as a major exporter to the Middle East, African and Asian regions.

The facts mentioned above explain the deal which caused wheat prices to drop to their lowest level of around $7.86 per bushel from highs of around $12.94 per bushel due to the Russian invasion of Ukraine.

Easing food prices are ideal for food processors and retailers, but may weigh on inventories involved in the primary grain trade.

Let’s take a look at some food stocks that are poised to win.

Archer Daniels Midland (NYSE: ADM)

ADM is a multinational food processing company, with a market capitalization of $48.53 billion. The company is involved in the procurement, transport, storage, processing and sale of raw materials, agricultural products and ingredients worldwide.

For now, the street is cautious but bullish on the stock. On TipRanks, the company has a moderate buy consensus rating, which is based on three buys and two takes. ADM’s average price target of $100.25 implies 16.1% upside potential. Shares of the company have soared about 29.1% so far this year.

Additionally, financial bloggers are 92% bullish on ADM, compared to an industry average of 74%.

Conagra Brands (NYSE: CAG)

Conagra Brands manufactures and sells processed and packaged foods and has a market capitalization of $16.91 billion. It has iconic brands like Birds Eye, Duncan Hines and Healthy Choice in its portfolio.

According to TipRanks, analysts have a Hold rating on the stock, which is based on one buy and six holds. CAG’s average price forecast of $35 implies downside potential of 0.7%. Shares of the company are up 6.3% year-to-date.

On the contrary, financial bloggers are 100% bullish on CAG, against an industry average of 66%.

Rise in cotton prices in the United States

Cotton futures rose nearly 13% in the last week ending August 12, recording the largest weekly jump since March 2011. The rise was largely due to lower cotton production due to extreme drought conditions in southwestern regions of the United States.

The United States Department of Agriculture (USDA) cut the national cotton crop estimate to 12.6 million bales, down 28% from a year earlier. The USDA also expects to witness the lowest end-of-season stocks in a long time, setting the tone for a further rise in cotton prices.

Against this backdrop, investors might consider taking a look at companies that focus primarily on primary crops like cotton. One of the companies that could benefit from rising cotton prices is listed below:

Farmland Partners Inc. (NYSE: REIT)

With a market capitalization of $808.82 million, Farmland Partners is a real estate investment trust (REIT) that buys, leases and manages high-quality farmland across North America. FPI’s real estate portfolio focuses on primary crops such as corn, soybeans, wheat, rice and cotton.

As for Wall Street, analysts appear to be cautiously bullish on REIT, which has a moderate buy rating based on a buy and hold. The average REIT price target of $16 implies upside potential of 7.1%. Shares of the company are up about 23.5% year-to-date.

Meanwhile, financial bloggers are 100% bullish on the REIT against the industry average of 67%.

Final Thoughts

The agricultural sector will always remain the most important and essential industry. Changes in commodity prices could impact the margins of space players, but they will continue to experience sustainable levels of demand. However, with regard to the current environment, a sharp rise in food prices can again be observed in the event of an escalation of the Russian-Ukrainian conflict. Meanwhile, lower cotton production is expected to hurt US exportable stocks and its position as the top cotton exporter.

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