The Zacks Agriculture - Products industry will benefit from the stable demand for food, supported by a growing population. Increasing consumer awareness regarding food ingredients and the preference for healthier alternatives will continue to boost the industry’s growth prospects. Alternative and innovative agricultural technologies like hydroponics and vertical farming are expected to be other key catalysts, given their inherent benefits.
Players like Bunge Limited (BG - Free Report) , The Andersons, Inc. (ANDE - Free Report) and Arcadia Biosciences (RKDA - Free Report) are poised well to gain from strong end-market demand and their ongoing growth initiatives.
Industry Description
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 engaged in purchasing, storing, transporting, processing and selling agricultural commodities or products derived from the same. They operate grain elevators, wherein income is earned 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 are offering innovative, plant-based health and wellness products. Companies producing lumber also fall under this industry.
Trends Shaping the Future of the Agriculture - Products Industry
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. Also, in response to growing consumer demand for healthier food alternatives, a number of agricultural and food-based companies are investing in innovation, and augmenting their product and market strategies to bring new quality and healthy food ingredients to the market. Ongoing improvements in grain-handling techniques and investment in larger storage spaces should aid the industry’s growth. 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 Are Key Catalysts: Hydroponics is gaining popularity as it gives growers the ability to better regulate 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, as well as environmental vulnerabilities. Also, 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.
High Costs to Hurt Margins: Players in the industry are facing rising labor, packaging and distribution costs, among other expenses. Companies engaged in animal products have been facing rising production costs for a while due to elevated feed ingredient prices . Even though feed prices are expected to ease somewhat from the peak levels, it still remains high the industry continues to navigate a tight labor market with a spike in wages and higher distribution costs. Supply-chain headwinds are also expected to be concerning in the near term. Companies are consistently implementing cost-reduction actions and pricing strategies to sustain margins in the current scenario.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Agriculture - Products industry is part of the broader Zacks Basic Materials sector. The industry currently carries a Zacks Industry Rank #111, which places it in the top 44% of the 252 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright 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.
Before we present a few stocks worth considering for your portfolio, let’s 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 gained 5.5% in the past 12 months compared with the S&P 500’s growth of 15.0% and the Basic Materials sector’s rise of 14.8%.
One-Year Price Performance
Industry'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 5.20X compared with the S&P 500’s 13.44X. The Basic Materials sector’s trailing 12-month EV/EBITDA is 10.08X. 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 12.82X and as low as 3.10X, with the median being 6.75X.
3 Agriculture - Products Stocks to Watch
Andersons: The company recently closed the acquisition of ACJ International, a pet food ingredient supplier that is in sync with its strategy to grow in the premium pet food ingredient industry. Aided by its effective working capital management, the company has managed to lower short-term debt to $103 million at the end of the second quarter of 2023 from the $1.2 billion at the end of the year-ago quarter. The company has managed to keep the long-term debt to EBITDA at less than its targeted 2.5 times. It is continuing to execute its strategy in its core grain and fertilizer verticals, including a greater focus on renewables and opportunities in renewable diesel feedstocks. The company’s shares have gained 41% in a year.
Maumee, OH-based Andersons operates in trade, renewables and plant nutrient sectors in the United States and internationally. The Zacks Consensus Estimate for ANDE’s earnings for fiscal 2023 has moved up 22% in the past 60 days. The company has a trailing four-quarter earnings surprise of 64.4%, on average. ANDE has a trailing four-quarter earnings surprise of 64.4%, on average. The company currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: ANDE
Arcadia Biosciences: The company has been streamlining its business to focus on higher-margin brands, while aggressively managing costs. Aided by its efforts, the second quarter of 2023 saw the lowest quarterly operating expenses since the fourth quarter of 2020. The company plans to sell its two remaining Body Care brands. It expects streamlined operations and organizational changes to lead to savings of $2 million in operating expenses in the remainder of 2023 and $3-$4 million annually. This move will help it focus on the more promising GoodWheat and Zola brands. Its GoodWheat flour recently entered the $850-million baking mix category with the launch of better-for-you pancake and waffle mixes. Zola coconut water has reversed its downward distribution trend in the second quarter of 2023. RKDA plans to ramp up innovation for the brand, with some flavor launches expected in the first quarter of 2024. The company’s shares have lost 89.6% in a year but are expected to trend up eventually, backed by the above-mentioned tailwinds.
Arcadia is a producer and marketer of innovative, plant-based health and wellness products. RKDA used non-genetically modified advanced breeding techniques to develop its proprietary innovations, which it is now commercializing by selling seed and grain, food ingredients and products, hemp extracts, trait licensing, and royalty agreements. Over the past 60 days, the Zacks Consensus Estimate for this Davis, CA-based player’s fiscal 2023 earnings has narrowed from the previously stated loss of 21.85 per share to a loss of $11.05. RKDA has a trailing four-quarter earnings surprise of 41%, on average. It currently carries a Zacks Rank #2 (Buy).
Price & Consensus: RKDA
Bunge: The company’s shares have gained 19% since it announced entering a definitive agreement with Viterra Limited in June. This merger will create an innovative global agribusiness 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 risk and increase resiliency. BG also recently reported upbeat second-quarter 2023 results, with adjusted earnings improving 25% year-over-year. In the Agribusiness segment, results were driven by softseed crush and strong Brazil soybean origination, which also contributed to higher crush results in Brazil, and crush operations in Europe and Asia. The Refined & Specialty Oils segment has been gaining on strong food and fuel demand. The company’s shares have gained 15.4% in the past year.
Bunge is an integrated global agribusiness and food company covering the farm-to-consumer food chain. The Zacks Consensus Estimate for this St. Louis, MO-based player’s ongoing-year earnings has moved up 5% to $12.13 over the past 60 days. BG has a trailing four-quarter earnings surprise of 20.4%, on average. It carries a Zacks Rank #3 (Hold) at present.
Price & Consensus: BG
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