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Agriculture Operations Outlook: Tariffs to Mar Organic Gains

Rajani Lohia

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 products are used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.

Some of the prominent stocks in this industry are Archer Daniels Midland Company (ADM), Adecoagro S.A. (AGRO) and Calyxt Inc. (CLXT).

Here are the industry’s three major themes:
 

  • The industry is riding high on the benefits of the organic movement, wherein 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. This shift to organic methods to satisfy consumers’ increasing demand for healthier food bodes well for agri-based product companies.
     
  • The agriculture industry is witnessing a slowdown according to the USDA’s latest agricultural export projections for fiscal 2019. USDA estimates agricultural exports of $137 billion for fiscal 2019, which ends on Sep 30 (down $4.5 billion from the February forecast). The soft view is mainly due to cutbacks in grains, oilseeds, livestock and products. Export volumes of commodities will continue to reflect the impact of the retaliatory tariffs already in place and the additional tariffs announced by China on May 13.
     
  • The U.S.-China trade war has done much damage to the growth of the U.S. agricultural segment in the recent past. Adversities arising from China’s retaliatory tariffs on American agricultural products, such as soybeans, corn, pork and poultry, have been a major concern for the U.S. farming segment. Among these, soybean was the most impacted as China is the largest importer. The USDA’s long-term projections report suggests that U.S. soybean exports are far from returning to pre-trade war levels until 2026-2027, mainly as Brazil and Argentina gain market share in soybean exports. Over the longer term, the agricultural sector will continue to adjust to the ongoing China-U.S. trade dispute. Consequently, the U.S. agricultural space is likely to witness a shift from the production of lower-priced soybean to corn and wheat for relatively higher returns. Nevertheless, possibilities of renewed talks to end the prolonged trade dispute and China agreeing to the purchase U.S. commodities might fuel optimism about the industry’s near-term prospects.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Agriculture – Operations industry is a nine-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #110, which places it at the top 43% 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 strong 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 gaining confidence in this group’s earnings growth potential for the next year. In the past two months, the industry’s earnings estimates for 2020 have increased by nearly 4.9%.

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 declined 20.9% compared with the Zacks S&P 500 composite that has dipped 0.2%. In contrast, the Zacks Consumer Staples sector has improved 0.8% 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 13.93X compared with the S&P 500’s 16.61X and the sector’s 19.29X.

Over the last five years, the industry has traded as high as 16.01X, as low as 10.31X, and at the median of 13.99X, 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. However, U.S.-China trade tensions are hurting the top line of most industry players. Though renewed talks to end the trade dispute and China agreeing to the purchase U.S. commodities might perk up the industry’s prospects, a conclusive deal on trade relations is yet to be arrived at. This keeps the fate of the Zacks Agriculture – Operations industry unclear.

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

Calavo Growers, Inc. (CVGW): The consensus EPS estimate for fiscal 2020 for this Santa Paula, CA-based company has remained stable in the past 30 days. The company markets and distributes avocados and other perishable foods in the United States. This Zacks Rank #2 stock has rallied 23.3% year to date.


Price and Consensus: CVGW


Corteva, Inc. (CTVA): The stock of this Wilmington, DE-based company, which was spun-off from DowDupont on Jun 1, 2019, has gained 21.9% since then. The company is currently operating as an independent supplier of agricultural products worldwide. The Zacks Consensus Estimate for the current year has moved up by 8.9% in the last 30 days. The company currently has a Zacks Rank #3.


Price and Consensus: CTVA


S&W Seed Company (SANW): This Sacramento, CA-based company carries a Zacks Rank #3 and has surged 32.1% 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


Limoneira Company (LMNR): The stock of this California-based company has gained 2.4% in the past month. The consensus EPS estimate for the current year has been stable for the past 30 days. The company currently has a Zacks Rank #3.


Price and Consensus: LMNR

 

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S&W Seed Company (SANW) : Free Stock Analysis Report
 
Limoneira Co (LMNR) : Free Stock Analysis Report
 
Calavo Growers, Inc. (CVGW) : Free Stock Analysis Report
 
Corteva, Inc. (CTVA) : Free Stock Analysis Report
 
Calyxt, Inc. (CLXT) : Free Stock Analysis Report
 
Adecoagro S.A. (AGRO) : Free Stock Analysis Report
 
Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
 
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