My Top Three Agriculture Investments

golden wheat field and sunny day

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Pasta, bread, pastries, pizza, breakfast cereals, and many other products we consume daily rely on wheat for their very existence. However, with Russia’s invasion of Ukraine, the world faces a wheat problem. Russia is the world’s largest wheat exporter and combined, and the two countries together account for around 28% of global wheat exports. Now that the countries are at war, we can expect to see exports fall dramatically from this part of the world.

Wheat production

Wheat (Statista.com)

The West is heavily sanctioning Russia, and Ukrainian farmers will have difficulty cultivating and exporting wheat in times of war and occupation. Moreover, many Ukrainian wheat fields are littered with mines, and the country’s Black Sea ports are not likely going to function effectively any time soon.

Therefore, we can presume that the decline in wheat production will be a prolonged phenomenon and not something that will bounce back quickly in the coming months or years even. Moreover, inflation is raging in many parts of the world, including the U.S., and wheat prices have been rising substantially and even went parabolic recently.

Wheat Futures

Wheat price

Wheat price (TradingEconomics.com)

CPI Inflation

CPI

CPI (TradingEconomics.com)

While the Fed is raising interest rates, normalization will likely be a lengthy process. Therefore, prices of wheat and other agricultural commodities may remain elevated for a prolonged time frame. Specific companies specializing in fertilizer, farming equipment, and other agrarian aspects have done well recently and should continue outperforming in the coming quarters.

1. The Mosaic Company (MOS) was my 2021 top pick in the All-Weather Portfolio “AWP.”

MOS

MOS (StockCharts.com)

Mosaic’s stock is up by approximately 125% over the past year, and while a consolidation/mild pullback phase seems likely, the stock likely has more upside ahead. The company has earned around $5 in EPS over the last four quarters. This result puts the company’s TTM P/E multiple at about 14.7. However, 2022 consensus estimates are for $11.20 in EPS, more than a 100% increase over 2021’s results.

EPS Estimates

EPS

EPS (SeekingAlpha.com)

If the company can achieve consensus estimates, the stock is only trading at 6.6 times forward EPS, remarkably cheap. However, some analysts expect a decline in EPS in 2023 and 2024. The declining EPS forecasts likely have to do with expectations for significantly lower inflation in future years. However, inflation may not decline as dramatically as some expect. The Fed cannot hike interest rates considerably due to the large loads of debt in all corners of the economy.

Conversely, we may see inflation remain persistently high for a more extended time frame, and commodity prices may remain elevated for a long time. Therefore, Mosaic’s earnings should not decline as much as anticipated in future quarters and may even increase in coming years. This higher-than-expected EPS dynamic should provide multiple expansion and the company’s stock should move higher as we advance.

What future financials for Mosaic may look like:

Year 2022 2023 2024 2025
Revenue $19.5B $20B $21B $22.5B
EPS $11.20 $12.90 $14.50 $16
EPS growth 15% 12% 10% 8%
P/E ratio 8 9 10 12
Stock price $90 $116 $145 $192

Source: Author

2. While Mosaic remains a top pick moving forward, a solid ETF to consider is the VanEck Vectors Agribusiness ETF (MOO).

MOO

MOO (StockCharts.com)

MOO is up by only about 20% over the last year, but this ETF could have significant upside ahead in the coming years. We see a bullish flag pattern after a prolonged consolidation phase. Further consolidation is likely before the next leg rises, and we could see considerably higher prices in future years.

MOO’s Top Holdings

MOO

MOO (SeekingAlpha.com)

MOO is a top-heavy ETF, with its top ten holdings accounting for approximately 58% of the ETF’s weight. MOO has a total of 58 holdings. The top holding here at 8.3% is Deere & Company (DE), a company that could deliver around $28 in EPS in 2023. This estimate puts the company’s forward P/E ratio at about 15, relatively inexpensive for a company in Deer’s position. Also, we see a familiar trend of some analysts predicting an earnings decline in future years. However, due to high inflation and increasing demand for agricultural products, the slide in earnings may not occur as soon as estimated.

At about 8.25% of holdings is Bayer AG (OTCPK:BAYZF), the German company that acquired fertilizer giant Monsanto. Other top holdings include Nutrien (NTR), Archer-Daniels (ADM), Corteva (CTVA), Mosaic, and others. Generally, this ETF is comprised of top companies that should benefit from the rising prices and higher demand in the agriculture business. Therefore, this ETF will likely climb significantly higher in future years.

3. Intrepid Potash, Inc. (IPI) – Top Speculative Play.

IPI

IPI (StockCharts.com)

Unfortunately, I don’t own Intrepid Potash, but this stock has tripled over the last year. Analysts’ (consensus) earnings estimates are for about $9.30 this year, putting IPI’s forward P/E ratio at around 11. While we see spectacular revenue and EPS growth this year, many analysts believe that future sales and earnings will decline as the Fed puts the brakes on inflation and higher prices. However, we may see a similar dynamic play out with IPI, as the company’s earnings could continue rising in the high inflation, robust demand atmosphere.

The Bottom Line

Agriculture has done well recently, especially since inflation began picking up. However, we are probably still in the early innings of this inflationary ball game. Many analysts are factoring in earnings and sales declines for Mosaic, Intrepid Potash, and other agricultural stocks. Due to these lower estimates, we see top companies trading at relatively low P/E multiples now.

Nevertheless, with persistent inflation and robust demand, we could see earnings and revenues continue to climb in future years. Therefore, Mosaic, VanEck’s Agribusiness ETF, and Intrepid Potash could continue appreciating considerably in the coming years. I am staying long Mosaic and will add Intrepid Potash and MOO on pullbacks as we advance.

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