The Zacks Agriculture - Products industry has been bearing the brunt of high input costs, labor shortages and supply-chain headwinds. The decline in commodity prices adds to the concerns. Nevertheless, increasing consumer awareness regarding food ingredients and the preference for healthier alternatives will support the industry. Alternative agricultural technologies like hydroponics and vertical farming are expected to be other key catalysts, given their inherent benefits.
Players like Bunge BG, West Fraser Timber Co. WFG, Hydrofarm HYFM and Arcadia Biosciences RKDA are poised well to gain from the strong demand in their end markets and ongoing growth initiatives.
About the Industry
The Zacks Agriculture – Products industry comprises companies that are either involved in storing agricultural commodities, distributing ingredients to others, or engaged in farming crops, livestock and poultry products. Some are involved in purchasing, storing, transporting, processing and selling agricultural commodities or products derived from the same. They operate grain elevators, wherein income is generated from commodities bought and sold using these elevators or held as inventory. Some companies provide nutrients, advanced indoor and greenhouse lighting, environmental control systems, and accessories for hydroponic gardening — the method of growing plants using mineral nutrient solutions in a water solvent instead of soil. A few players offer innovative, plant-based health and wellness products. Companies producing lumber also fall under this industry.
Trends Shaping the Future of the Agriculture - Products Industry
Low Commodity Prices, High Costs Act as Woes: Soybean prices have been down 24.4% year-to-date. Prices are currently below $10 per bushel, the lowest level since late August, as improving crop conditions in Brazil and expectations of a bumper harvest in the United States weighed on prices. Corn have declined 13.1% since the beginning of 2024 to $4.1 per bushel, weighed down by ample supply. The USDA projects a net farm income of $140 billion for 2024, indicating a decline of 4.4% from that reported in 2023. Net cash farm income is expected to decrease 7.2% to $154.1 billion in 2024. Total crop receipts will decline 10% to $249 billion due to lower receipts for corn and soybeans, as lower prices for both should negate gains from higher sales volumes. Players in the industry have also been facing rising labor, packaging and distribution costs, among others. Companies are implementing cost-reduction actions and pricing strategies to sustain margins in the current scenario.
Solid Demand to Support Industry: Demand for food is directly influenced by population and demographic changes beside income growth and income distribution. Per the United Nations, the global population will rise to 8.5 billion in 2030 and 9.7 billion in 2050. This would lead to a 50% increase in global food demand. In response to the growing consumer demand for healthier food alternatives, several agricultural and food-based companies are investing in innovation and augmenting their product and market strategies to bring new quality and nutritious food ingredients. Ongoing improvements in grain-handling techniques and investment in larger storage spaces will likely support the industry. Plus, stable earnings across all cycles are ensured, considering the industry’s products are always in demand, irrespective of the condition of the economy.
Hydroponics & Cannabis Act as Key Catalysts: Hydroponics is gaining popularity as it allows growers to regulate better, and control nutrient delivery, light, air, water, humidity, pests and temperature in an indoor setting. It can help produce crops faster with higher yields than traditional soil-based growers. It is being utilized in new and emerging industries, including the cultivation of cannabis and hemp. Vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland and environmental vulnerabilities. Vertical farming is the latest agricultural technology, wherein companies use shelves and artificial light to grow produce, minimizing land and water consumption. Total sales for the hydroponic equipment industry are projected to surpass $16 billion by 2025. Even though the cannabis industry is undergoing a rough patch due to an oversupply, its long-term prospects are intact. In the United States, several states have legalized cannabis for medical or recreational use, representing the largest market in the world. By 2027, spending on legal cannabis is expected to reach $47.3 billion in North America.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture - Products industry is part of the broader Zacks Basic Materials sector. The industry currently carries a Zacks Industry Rank #174, which places it in the bottom 30% of the 251 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 the downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts of late have been losing confidence in this group’s potential. Since the beginning of 2024, the industry’s earnings per share estimates for 2024 and 2024 have moved down 34%.
Before we present a few stocks worth considering for your portfolio, let us look at the industry’s recent stock market performance and valuation.
Industry Versus Broader Market
The Zacks Agriculture – Products industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have moved up 10.6% in the past 12 months compared with the S&P 500’s growth of 38.2%. The Basic Materials sector has gained 18.8% in the same timeframe.
One-Year Price Performance
Indusrtry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, a commonly used multiple for valuing Agriculture - Products stocks, we see that the industry is currently trading at 5.61X compared with the S&P 500’s 19.52X. The Basic Materials sector’s trailing 12-month EV/EBITDA is 12.50X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Over the last five years, the industry has traded as high as 9.52X and as low as 3.10X, the median being 4.94X.
4 Agriculture - Products Stocks to Watch
Bunge: The company recently completed the sale of its 50% share in BP Bunge Bioenergia. As a result of this deal, it will no longer have any interest in its bioenergy and sugarcane ethanol businesses in Brazil. This move will help BG focus on its core businesses and strengthen its balance sheet. The company is progressing on its integration process with Vinterra, which was announced in 2023. This merger will create an innovative global agribusiness solutions company with an enhanced global network, and grain and softseed handling capacity. With a diversified mix across geographies, seasonal cycles and crops, the company will be better positioned to manage risks and increase resiliency. BG’s efforts to boost its footprint, build relationships with farmers and end consumers, and strengthen its digital capabilities will boost growth.
Bunge is an integrated global agribusiness and food company covering the farm-to-consumer food chain. The St. Louis, MO-based company has a trailing four-quarter earnings surprise of 18.7%, on average. BG currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: BG
West Fraser: The company has been witnessing solid demand for oriented strand board, plywood and other engineered products in North America, driven by home construction markets. WFG’s strategy of optimizing its portfolio through acquisitions, divestitures, mill curtailments and significant capital investments is expected to contribute to its growth. West Fraser's emphasis on enhancing operational efficiency and reducing costs will aid margins. With strong financial flexibility and a favorable cost position, the company is well-positioned to maintain a competitive edge.
The Zacks Consensus Estimate for this Vancouver, Canada-based company’s earnings for 2024 suggests year-over-year growth of 73.5%. The estimate has been unchanged in the past 30 days at $2.03 per share. This diversified wood products company has a trailing four-quarter earnings surprise of 228%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: WFG
Hydrofarm: The company is focused on streamlining operations, reducing costs and improving efficiencies. Major initiatives include narrowing the product and brand portfolio, relocating and consolidating certain manufacturing and distribution centers, and the sale of assets related to the production of certain durable equipment products. Earlier this year, Hydrofarm sold its proprietary branded IGE products. As a result of the transaction, it expects improved profitability on future IGE-branded product sales due to an anticipated decrease in fixed costs. The company has also been expanding its reach to serve non-cannabis controlled-environment applications, including food, floral, and lawn and garden.
Shoemakersville, PA-based Hydrofarm engages in the manufacturing and distribution of controlled-environment agriculture equipment, and supplies in the United States and Canada. The Zacks Consensus Estimate for HYFM’s earnings for fiscal 2024 indicates year-over-year growth of 7.5%. The estimate has been unchanged over the past 30 days. HYFM currently carries a Zacks Rank #3.
Price & Consensus: HYFM
Arcadia: The company has been streamlining its business to focus on higher-margin brands while aggressively managing costs. RKDA monetized its wheat intellectual property through two transactions. In May 2024, Arcadia sold its non-GMO Resistant Starch Durum trait to longtime partner Corteva Agriscience and also sold its GoodWheat brand to Above Food Corp. Given customer preference for Zola compared with other leading coconut water brands, RKDA plans to continue to invest in trial-driving activities and expand distribution of the Zola coconut water brand through mass market retailers and grocery store chains. Distribution gains for Zola continued in the second quarter of 2024 as the new pineapple and lime flavors began shipping in the same quarter. Zola sales outperformed the coconut water category, with year-over-year sales increasing 42%. Also, the Zola category carries a higher gross margin than the legacy GoodWheat business.
Arcadia is a producer and marketer of innovative, plant-based products. In the past 30 days, the Zacks Consensus Estimate for this Davis, CA-based player’s fiscal 2024 earnings has been unchanged. Its earnings estimates indicate year-over-year growth of 84.6%. RKDA has a trailing four-quarter earnings surprise of 7.4%, on average. The company currently carries a Zacks Rank #3.
Price & Consensus: RKDA
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