The world is now suffering a major price shock as inflation continues to creep higher. Global supply-chain problems post-pandemic, strong consumer demand driven by historically robust job and nominal wage growth; and the war in Ukraine, which has caused natural gas prices to rise significantly, have all added to this inflationary pressure.
This inflation is being felt across multiple sectors – food & agriculture is no exception. As food prices continue to climb higher, food & agriculture companies have come under the investment spotlight.
Generally speaking, as we’ve seen many times in history, as farmers make more money, they have had the tendency to pour it into equipment, seeds and fertilisers.
The broad view
Farmers are indispensable managers of the natural environment. They understand regional ecosystems and the sustainability challenges of their communities better than anyone, making them vital players in our pathway to global food sustainability.
It is imperative, therefore, that our global pursuit to feed the world’s 10 billion people is lined with a mission to protect our farmers and their livelihoods.
While new and innovative farming technologies must reduce energy consumption and greenhouse gas emissions and improve our soil health by reducing water and chemical inputs, these same technologies must also ensure that our farmers can increase their productivity and yields without compromising on quality and productivity and their business health.
Ultimately, farming has to be economical if we want all our sustainability objectives for the food and agriculture sector to be viable and materialise in the long run.
Below we examine two agriculture tech companies that we believe are well positioned to ride not just the current bull market in food and agriculture but which are also living, breathing examples of companies that are turning our pursuit of greater sustainability in food and agriculture into an increasingly more probable reality.
AGCO
AGCO Corporation (AGCO) is a global leader in the design, manufacture and distribution of agricultural machinery and precision agriculture technology. In a recent interview with CNBC on March 24th, 2022, the company’s chief executive Eric Hansotia, commented that AGCO is prioritising helping farmers increase their crop without exhausting their limited supply or having to make purchases (read: fertilisers) that could eat into their profits.
He added that the company’s investments in technology firms such as Apex.AI and Greeneye Technology, including its acquisition of Appareo Systems, are contributing to its mission.
AGCO’s stellar sales volume, robust end-market demand and positive pricing are likely to deliver impressive results for the current year. Increasing replacement demand for aging fleets will also drive its top line.
AGCO continues to invest in premium technology and smart farming solutions in a bid to strengthen product offerings. In addition, cost-control actions in response to material cost inflation will likely drive margins.
AGCO delivers value to farmers through its differentiated brand offerings that include Fendt, Precision Planting and Valtra. Fendt, for example, is a leading German hi-tech brand that manufactures tractors, combine harvesters, balers and telescopic handlers designed to improve performance and efficiency.
One of the company’s other brands, Precision Planting, provides practical and effective precision agriculture technologies to help farmers continuously improve their operations.
Deere
Deere & Co is the world’s largest producer of agricultural equipment and technology. The company has been very vocal in its desire to pivot its entire business into a fully-fledged agriculture tech platform.
In 2020, it announced a new vision and operating model to accelerate success through the integration of smart technology into its legacy manufacturing.
This Smart Industrial strategy focuses on delivering intelligent, connected machines and applications that have the potential to transform production systems in agriculture and construction. The company wants to, among other things, by 2026, ensure that 100% of its new small agriculture equipment is digitally connected; (deliver a fully autonomous battery-powered electric agriculture tractor; and reach 500 million engaged acres (with 50% highly engaged).
Deere is well-poised to benefit from surging demand for agricultural equipment, driven by higher agricultural commodity prices. Also, the improved scenario in the construction and forestry sector and investments in precision agriculture will aid growth. Efforts to reduce operating expenses will improve margins. For 2022, analysts expect roughly 20% revenue and earnings growth. Even better, the latter is forecast to climb another 15% in 2023.
Farmers are more in demand than ever and with that increase in demand comes an increasing need in tools and machinery. This is going to bode well for Deere and other agriculture stocks going forward.
Rahul Bhushan is co-founder of Rize ETF. The views expressed above should not be taken as investment advice.