All signs point to an agricultural bonanza
Only half of the ABCD leaders are publicly-traded companies
The trend is your friend in ADM
BG is a leader in Brazil
Feeding the world is a growth sector for the coming years
The demand side of the fundamental equation has experienced substantial growth over the past two decades. At the turn of this century, approximately six billion people inhabited our planet, each requiring nutrition daily. As of last week’s end, the population has grown by 29% to over 7.74 billion. Each quarter, the world adds around 20 million more mouths to feed.
As food requirements are ever-increasing, agricultural production must keep pace. Technological advances in farming and processing crops into food products have increased output. However, the long-term trends in wheat, soybean, corn, and other agricultural products have displayed higher lows.
Meanwhile, technology cannot overcome the impact of the weather conditions on annual corps. In 2012, drought conditions in the US and other growing regions caused corn and bean prices to rise to all-time highs. Wheat rose to its second-highest price. Since then, bumper crops kept a lid on the leading grain and oilseed futures markets.
Last summer, grain prices began to appreciate. Over the past months, the leading grain and oilseed markets moved to multi-year highs. Beans are back in the teens, wheat is over $6 per bushel, and corn is sitting around $5.40 as the 2021 crop year in the northern hemisphere approaches. While the demand for food in 2021 will be higher than in 2020 as there are more people to feed, the weather will determine the path of least resistance of grain prices.
With prices at the highest levels in years, the prospects for earnings and share price growth for Archer Daniels Midland (ADM) and Bunge Limited (BG) have not been as bullish in quite some time. ADM and BG are companies that are supermarkets in the world.
All signs point to an agricultural bonanza
The price action in the three leading grain markets has been explosive over the past months. The trends in soybean, corn, and wheat futures markets remain bullish.
Source: CQG
The weekly continuous soybean futures chart shows the rally from a low of $8.0825 per bushel in April 2020 to the highest price since June 2014 at $14.3825 in January. At just above the $13.70 level on February 12, beans remain in the teens and near the recent high.
Source: CQG
The weekly corn futures chart illustrates the move from a low of $3.0025 in April to a high of $5.7425 per bushel this week. Corn was sitting closer to the high on February 12.
Source: CQG
Nearby CBOT wheat futures rose from a low of $4.6825 in 2020 to a high of $6.93 per bushel in January. Nearby wheat was trading at over the $6.35 level on February 12.
Explosive moves in the top grain and oilseed futures markets point to a profitable 2021 crop year for farmers, agricultural processors, and related agribusinesses over the coming months and perhaps years.
Only half of the ABCD leaders are publicly-traded companies
The ABCD of agriculture consists of four companies that control approximately 70% of the grain industry. ADM, BG, Cargill, and Louis Dreyfus are the four firms. Cargill and Louis Dreyfus are private family-owned businesses, while ADM and BG are publicly-traded corporations.
All four companies remain a dominant force in the global grain and agricultural markets. The rally in grain prices creates a potential earnings bonanza for the ABCD companies. Higher grain prices make the agribusiness a growth sector for Investors looking for exposure to the agricultural industry. The A-B of the four is the company of choice.
The trend is your friend in ADM
Archer Daniels Midland (ADM) procures, transports, stores, processes, and merchandises agricultural commodity products and ingredients in the United States and worldwide. ADM operates through three segments, including Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. At $55.72 per share, ADM has a $30.986 billion market cap. The company pays shareholders a $1.48 or 2.66% dividend.
Source: Barchart
After reaching the lowest level since February 2013 at $28.92 in March 2020, ADM shares have steadily climbed. ADM reached its most recent high of $55.77 on January 20 and was sitting near that level on February 12. The trend over the past eleven months has been higher, with ADM making higher lows and higher highs. The February 12 high was an all-time peak in ADM shares.
Source: Yahoo Finance
ADM has beat consensus EPS estimates over the past four consecutive quarters. The average forecast for Q1 2021 is for earnings of $1.02 per share.
Source: Yahoo Finance
Revenues and earnings were steady from 2017 through 2020. Rising grain prices are likely to boost the levels in 2021.
BG is a leader in Brazil
Bunge Limited (BG) operates as a worldwide agribusiness and food company. BG operates in five sectors, including Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer. At $78.00 per share on February 12, BG’s market cap was $10.894 billion. The company pays shareholders a $2.00 per share or 2.56% dividend.
Source: Barchart
The shares fell to the lowest level since October 2008 in March 2020 when BG traded to $29.00. Since then, the shares climbed to a high of $78.05 on February 12 and closed last week near the high. The all-time peak in BG shares came in 2008 at $135.00.
Source: Yahoo Finance
BG beat consensus earnings forecasts in three of the past four quarters. In Q1 2020, the company missed but got back on track in Q2. BG reported fourth-quarter earnings on February 10. The market had forecast earnings of $1.82 per share, and BG blew away the estimate with earnings of $3.05 sending the shares to the highest level since March 2018.
Source: Yahoo Finance
The trend in quarterly revenues has been positive over the past four quarters. As with ADM, rising agricultural commodity prices support a higher price for BG shares. Bunge is the leading multinational agribusiness in Brazil, a substantial exporter of products worldwide.
Feeding the world is a growth sector for the coming years
Rising population each year means that the addressable market for the leading agribusiness is ever-increasing. A bull market in grain prices is likely to increase revenues and profit markets for ADM and BG, making them growth stocks.
Aside from the potential for capital growth, both companies offer shareholders around 2.75% dividends that pay investors while waiting for higher share prices. ADM trades at around 17.71 times earnings, with BG’s P/E ratio at the 10.44 level. The average price to earnings ratio of the S&P 500 is around the 40.06 level. ADM and BG are companies that feed the world that trade at multiples far below the market’s average.
Population growth, inflationary pressures because of central bank liquidity and government stimulus, and a weak US dollar all support higher agricultural prices over the coming months and years. While the weather will be the critical factor for the path of least resistance of commodity prices over the forthcoming 2021 crop year, grains and oilseeds are off to a bullish start. ADM and BG have lots of catching up to do with the rest of the stock market. These two members of the ABCD companies that control around 70% of the grain markets stand to experience a bumper year for profits in 2021. ADM and BG are inexpensive compared to the stock market and could offer a compelling value proposition for investors looking for growth.
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BG shares were trading at $77.43 per share on Wednesday morning, down $1.88 (-2.37%). Year-to-date, BG has gained 18.85%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.
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