Even before Russia invaded Ukraine, prices for many agricultural products were on the rise due to supply shortages and growing demand for food as economies recover from the coronavirus crisis.
The dispute between Russia and Ukraine – major world producers of commodities such as corn, wheat, barley and potash – has driven prices even higher in anticipation of even greater supply shortages important.
Many agricultural stocks and exchange-traded funds have surged in recent weeks and are trading at or near record highs. As investors in the sector take advantage of rising prices, fund managers warn stocks will be volatile in the weeks and months ahead.
“The macroeconomic environment has changed significantly over the past two weeks,” said Mike Archibald, vice president and portfolio manager at AGF Investments. “For people watching space right now, I would suggest a certain level of caution.”
Archibald thinks the backdrop for agricultural commodities remains strong despite the turmoil in Eastern Europe, but doesn’t think now is the right time to buy many stocks in the sector.
In fact, he recently trimmed some of his holdings in Nutrien Ltd., Saskatoon-based NTR-T, the world’s largest fertilizer producer, whose share price has risen about 20% since Russia invaded Ukraine on February 24.
“Despite what has happened over the past two weeks, prices for many of these products are likely to remain high,” he said. “It’s just that sometimes stocks get a bit ahead of themselves. And I think that’s the situation we’re in right now.
Nutrien’s acting chief executive, Ken Seitz, recently said the company would increase potash production if it faced sustained supply problems in Russia and Belarus, the world’s second and third-largest potash-producing countries after Canada. .
“We could probably see a prolonged, more prolonged disruption in [potash] supply from this part of the world,” Seitz told a BMO Capital Markets investor conference last week, according to a Reuters report.
Supply disruptions aside, many investors believe a steadily growing population is a good reason to invest in agricultural stocks for the long term: United Nations projects the world’s population will increase from around 7.8 billion today to around 9.7 billion people by 2050. Agricultural businesses stand to benefit from the increased food production that will be needed to feed the world, including a growing middle class that will spend more.
Still, investment experts note that commodities are cyclical and recommend diversification by playing into different parts of the sector, including growers, retailers and agricultural technology (agtech) companies.
Christine Poole, chief executive and managing director of Toronto-based GlobeInvest Capital Management Inc., has been investing in agricultural stocks for her clients for years as a long-term play on population growth.
His clients owned Potash Corp. of Saskatchewan before it merged with Agrium Inc. in 2018 and became Nutrien – and retained it for its diversification in the sector, including its expanding retail division. Nutrien has more than 2,000 outlets in seven countries selling everything from nutrients and crop protection products to digital tools for farmers.
“The retail side is more consistent and provides a buffer when nutrient prices go the other way,” Ms. Poole says, which could happen given the recent spike in fertilizer prices due to global political tensions. and penalties that disrupt supply.
“We’re not looking at the stock right now,” she says. “We have it in our wallets, but for new customer money we’re staying away to see how it goes.”
AGF’s Archibald cites global farm equipment maker Deere & Co. DE-N as another way to invest in the sector. The stock has nearly tripled since the pandemic’s low point in mid-2020 and is up about 20% since the outbreak of the Russia-Ukraine conflict late last month.
“The demand for his products is extremely high right now from the farming community,” he says.
He notes that Deere is an iconic agricultural brand and geographically diverse, with about 60% of its revenue coming from North America and the rest from around the world.
Another idea for investors could be Ag Growth International Inc. AFN-T, a grain handling, storage and equipment company, which doubled from its pandemic lows and rose about 5% during of the last two weeks. Mr. Archibald says the business should benefit from the high price environment.
“They tend to delay the cycle slightly,” he says.
Mr. Archibald says the company’s business tends to pick up as prices rise, as farmers grow more crops and need more equipment and storage space.
Ag Growth tends to be a slightly more volatile stock than Nutrien because the company is smaller and has more leverage on the balance sheet, he says.
“However, the company generates more free cash flow and should be able to pay it back over the years,” he adds.
Investors may also be interested in smaller companies in the growing agritech space, such as CubicFarm Systems Corp. CUB-Twhich makes indoor farming technology.
“It’s more of a tech game,” Archibald says, but he also cautions that it’s small speculative business in an emerging space.
The company also has ambitious growth plans at a time when most food producers are looking for ways to increase production amid shrinking land.
The disruption in global wheat exports from Russia and Ukraine, combined with poor harvests in North America, is prompting investors to explore broad exposure to agriculture, including agtech, directly and through of ETFs, said Mark Yamada, managing director of PUR Investing Inc. in Toronto.
“ETFs offer well-diversified exposure to traditional and new ideas,” he says.
He mentions the iShares Global Agriculture Index ETF COW-T, a well-known commodity traded on the TSX that includes a mix of commodities, fertilizers, chemicals, machinery, packaged foods and meats. Top holdings include fertilizer company Mosaic Inc., food processing company Archer Daniels Midland Co. and agricultural commodity trading and processing company Bunge Ltd. The ETF is trading at record highs amid the Russia-Ukraine crisis.
Other examples he cites include the iShares MSCI Agriculture Producers ETF VEGI-A, with major holdings Deere and Nutrien, and the VanEck Agribusiness ETF MOO-A, with holdings such as animal medicine company Zoetis. Inc., the veterinary products and services company Idexx Laboratories Inc. and other traditional names in the agriculture industry. VEGI and MOO are also trading at record highs.
For those interested in agtech, Yamada notes there is the Global X AgTech and Food Innovation ETF KROP-Q, which provides exposure to companies ranging from chemical and seed supplier Corteva Inc. to plant-based protein firms Beyond Meat Inc. and Oatly Group UN B. The ETF is down about 20% since it began trading in July, falling alongside other tech names as many investors are moving away from growth stocks.
Mr Yamada says the industry will always be cyclical, “punctuated by periods of extreme disruption”, but he thinks agriculture – whether stocks or ETFs – should be in the portfolios of the most investors to offset market volatility.
“Put commodities in a portfolio always makes sense because they are generally not correlated with the rest of the market,” he says.