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Agriculture Operations Outlook: U.S. Corn Exports to be Feeble

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.

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 billion for fiscal 2020, which ends on Sep 30 (up $2 billion from the August forecast). The improved view is mainly due to better export prospects to China. Higher export volumes for soybean, pork and dairy products have aided the outlook. Pork exports are likely to rise on increased demand from China. The export forecast for China has been raised to $11.0 billion (from $3.5 billion in August), on higher expected demand for soybeans and pork.
     
  • The U.S.-China trade war has done much damage to the growth of the U.S. agricultural segment in the recent past. Although exports for soybeans and pork are expected to witness a steady rise, products like corn and poultry remain a major concern for the U.S. farming segment. U.S. corn exporters are likely to face strong competition from producers in South America (Brazil and Argentina), Ukraine, and less so in Russia as these countries have captured a larger share of the global corn trade in recent years. This shift in global corn production, and exports in favor of these low-cost and favorably located corn producers have already altered global trade. The recent share of corn trade for the United Sates have fallen below 40%, from historical levels of 60-80%, which once made it the powerhouse of corn exports. Going forward, the United States is expected to further lose its competitive edge to these low-cost corn producers. Consequently, the USDA projects U.S. corn exports at $9.0 billion, down $400 million from the prior forecast.
     
  • The industry is benefiting from 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. Moreover, the companies 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 nine-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #166, which places it at the bottom 34% 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 a dull near term. 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 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 for the next year. In the past year, the industry’s earnings estimates for 2020 have declined by nearly 35.5%.

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 gained 7.3% compared with the Zacks S&P 500 composite that has increased 29.3%. In contrast, the Zacks Consumer Staples sector has improved 20.2% 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 15.8X compared with the S&P 500’s 18.67X and the sector’s 19.74X.

Over the last five years, the industry has traded as high as 16.44X, as low as 10.66X, and at the median of 14.24X, 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. Further, increased demand for pork and soybeans from China since September 2019 is likely to aid U.S. agricultural exports. However, competition in the corn business is likely to hurt sentiment and top line of companies. Further, uncertainty in U.S.-China trade, Brexit, and slowing trade and investment globally leaves 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 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.

Adecoagro S.A. (AGRO): The consensus EPS estimate for 2020 for this Luxembourg City-based company has moved up in the past 30 days. The company engages in farming crops and other agricultural products, dairy operations, sugar, ethanol and energy production, and land transformation activities in South America. This Zacks Rank #2 stock has rallied 25.8% in the past year.

Price and Consensus: AGRO


Corteva, Inc. (CTVA): The stock of this Wilmington, DE-based company, which was spun-off from DowDupont on Jun 1, 2019, has gained 16.1% since then. The company is currently operating as an independent supplier of agricultural products worldwide. The Zacks Consensus Estimate for the next year has remained unchanged in the last 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: CTVA


Archer Daniels Midland Company (ADM): This Chicago, IL-based company carries a Zacks Rank #3 and has surged 13.3% in the past year. The Zacks Consensus Estimate for the company’s 2020 EPS has been stable for the past seven days.

Price and Consensus: ADM


Seed Company (SANW): This Sacramento, CA-based company carries a Zacks Rank #3 and has surged 11.2% in the past year. The Zacks Consensus Estimate for the company’s next fiscal EPS has been stable for the past 30 days.

Price and Consensus: SANW


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S&W Seed Company (SANW) : Free Stock Analysis Report
 
Corteva, Inc. (CTVA) : 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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